Confusion reigns over debt interest
Until the Supreme Court of Appeal explains how to deal with the interest paid on debt when consumers go under debt counselling, the process will not bring relief to the overindebted.
Ken Bredenkamp, an attorney who specialises in the National Credit Act, says a declaratory order is needed to guide magistrates, debt counsellors, credit providers and consumers in the debt review process.
Bredenkamp was responding to the most recent declaratory order to be handed down by the High Court in Cape Town - which conflicts with another explanatory order in the same jurisdiction.
The orders are issued to clear up ambiguities around the rights and duties of parties, and only apply to the province in which they are issued.
According to the declaratory order made by Judge Rosheni Allie in Cape Town last week, magistrates have the authority under the NCA to vary the interest rates that apply to your debts when you are in debt review - but only where there is agreement between consumers and their creditors.
However, last October Judge Patrick Gamble ruled that a magistrate's court "does not have the jurisdiction to vary - by reduction or otherwise - a contractually agreed interest rate determined by a credit agreement". Significantly, Gamble also found that a proposal rearranging the debt of a consumer under debt review "does not meet the purposes of the NCA" if the monthly instalment is less than the monthly interest which accrues on the outstanding balance.
Gamble's judgment endorsed a declara-tory order issued by Judge Glen Goosen in the High Court in Port Elizabeth in March last year.
Since the issuing of Gamble's order, debt counsellors have been thwarted in their attempts to get debt review applications issued by magistrates in the Western Cape, because in most cases the debt counsellor proposes a variation in the interest rates.
Magistrates are bound to follow the decisions made by high courts.
Debt counsellor Hans Reinhard Pettenburger-Perwald, who owns debt counselling firm Debt Therapy, has had 35 debt review applications postponed indefinitely by magistrates in the Western Cape and one has been dismissed. He has taken this case on appeal.
Pretoria-based debt counsellor Charl Marais says other conflicting declaratory orders have been handed down in Port Elizabeth, Bloemfontein and Pretoria.
"Unless this situation is remedied, we could see lawyers forum shopping in the same way that they did for courts that were liberal in issuing emolument attachment orders," he says.
Marais is one of a few debt counsellors to say that if debt review was being carried out according to the letter of the law, there would be no need to vary interest rates. The NCA does not provide for interest on debts under review to be reduced - by debt counsellors, magistrates or credit providers - unless there has been reckless lending. They say the reason the act is silent on the issue of interest rates is because it is implied that interest forms part of the consumer's "total" debt obligation, which is rearranged in debt review.
According to the act, where a consumer qualifies for debt review (in other words is overindebted), a debt counsellor prepares a court application for appropriate relief.
This takes the form of a recommendation that one or more of the consumer's credit agreements be declared reckless and/or a recommendation that the consumer's debts be "rearranged by extending the period of the agreement and reducing the payment due accordingly".
Only in the case of reckless or unlawful lending can the debt counsellor propose that a debt be recalculated.
Certificate of balance
Debt counsellor Deborah Solomon says problems begin immediately the overindebted person goes for counselling.
The consumer is obliged to provide the debt counsellor with the "total outstanding balance" on all accounts - which must include interest, insurance and all charges due to the credit provider, as per the credit agreement. However, the phrase "total outstanding balance" could be open to interpretation.
"Since consumers don't know their total outstanding balance, debt counsellors are reliant on credit providers for this information," Solomon says.
"But credit providers issue debt counsellors with a 'certificate of balance', which does not include interest over the full term. This certificate is not referred to in the act or the regulations. This balance is valid for a month only, or until interest is levied again."
All sorts of problems
Solomon says credit providers do this because they want to be able to continue charging interest on debts where the term has been extended.
"When debt counsellors use a certificate of balance, it leads to all sorts of problems. The creditor continues charging interest, which often results in complaints to the regulator about the debt counsellor that debts in debt review are growing. But there's a court order in place, consented to by the consumer and their creditors."
Bredenkamp says the only way to resolve the problem is for a declaratory order by the Supreme Court of Appeal on this matter, including explaining how magistrates should approach such proposals.
The declaratory relief sought should stipulate how to calculate the obligation of the consumer at the outset of the process, he says. "A useful starting point is the contractually agreed amount, inclusive of interest in terms of the agreement, which the consumer agreed to repay prior to becoming overindebted."
It would be fitting for the National Credit Regulator to seek a declaratory order, with interested parties being able to join the proceedings and make submissions, Bredenkamp says.
Nthupang Magolego, a senior legal adviser at the NCR, says the regulator supports the principle of the latest declaratory order that a magistrate has the power to approve a debt rearrangement proposal in which a change to the interest rate has been agreed to between the consumer and credit provider. She says Allie's order was made as the NCR was about to launch an application for a declaratory order in the High Court in Cape Town.
The NCR has requested information from other provinces to determine whether magistrates are following the Goosen judgment "so as to bring declaratory applications in those courts", Magolego says.
"Our plan is to issue a circular advising the industry about our endorsement of this [Allie's] decision."