An improvement in your circumstances may not be enough to get you out of debt counselling - the law only allows you to exit when most debts are settled. Picture:
An improvement in your circumstances may not be enough to get you out of debt counselling - the law only allows you to exit when most debts are settled. Picture:

Up until early this year, exiting debt counselling has been a cakewalk for consumers in Gauteng, even if in the rest of SA high courts refuse to declare consumers "no longer overindebted" when their financial circumstances improve.

This week a full bench of the Gauteng Division of the High Court heard a case that will determine how they deal with applications from consumers who want to get out of debt review before they have been able to pay off all their debts.

This follows a practice directive issued by judge president Dunstan Mlambo in February. Since then, the high courts in Gauteng have been prohibited from hearing applications from consumers seeking such orders.

The directive was issued in response to two unopposed applications made in September last year. In both cases, the applicants said their financial circumstances had improved dramatically, yet neither of them was able to settle their debts in full.

Both consumers asked the court to reverse their debt counsellors' finding that they were overindebted and to order that they were no longer in debt review and to clear their credit reports.

Judge Brenda Neukircher ordered that the cases be heard by the full court in light of conflicting judgments on the competency of the high courts to hear and grant relief in such cases outside of Gauteng.

The judgments in all the other jurisdictions were made in cases where consumers had engaged a debt counsellor, but the finding that they were overindebted had never been made an order of the court.

Many consumers enter into debt counselling without realising that once they're in, there are only two ways out: pay off all your debts in full, or pay off all your short-term debts plus catch up on the arrears on your home loan or any other long-term loans and revert to paying the original instalments.

They asked the court to reserve their debt counsellors' findings and to clear their credit reports

Only then can a debt counsellor issue you with a clearance certificate, which effectively releases you from debt review. Once a clearance certificate has been issued, credit bureaus must remove your debt-review status - which prohibits you from taking on more credit - from your credit report.

But what happens if your financial circumstances change while you're in debt counselling and you're suddenly earning much more, or you receive a windfall, and are no longer overindebted? And what can you do if your circumstances change after a debt counsellor has accepted your application to go into debt counselling, but a court hasn't yet declared you to be overindebted and granted an order for the rearrangement of your debts? Should you be allowed to exit debt counselling, and if so, on what terms, who can release you, and how?

The National Credit Act (NCA) makes no provision for you to withdraw from debt counselling, nor does it empower your debt counsellor to release you.

In 2015, the National Credit Regulator (NCR) issued guidelines for debt counsellors, saying consumers must make applications to withdraw from counselling to the magistrate's court, which must declare that the consumer is no longer overindebted.

However, the NCR's guidelines are not law and the magistrate's court is a creature of statute, with no authority to grant such an order.

In the matter heard this week, arguments were made by the NCR, the Banking Association of SA (Basa), the Law Society of SA (LSSA) and debt counsellor Michelle Barnardt as friends of the court.

The applicants, represented by Stephan van der Hoven, argued that even if a consumer hasn't been declared overindebted by a magistrate's court, a high court is able to declare the consumer "no longer overindebted".

According to Van der Hoven, last year alone 19 judges in Gauteng granted no fewer than 39 applications seeking similar relief.

The regulator argued that the high court should not be able to declare a consumer "no longer overindebted" in the absence of a declaration of overindebtedness by a court.

While the NCA does not dictate which court can declare a consumer overindebted, when a magistrate has found the consumer to be overindebted, only a magistrate can find that the consumer is no longer overindebted, the NCR argued.

Basa said no court has the power to declare a consumer "no longer overindebted". There is no way to terminate debt review once a debt counsellor has concluded that a consumer is overindebted.

Barnardt argued that the magistrate's court does not have the jurisdiction to issue declaratory orders and allowing the high court to declare a consumer "no longer overindebted" when the consumer hasn't been declared overindebted would be like asking a court to grant a couple a divorce before they've even married. The LSSA argued that the role of the high court is limited to developing common law and interpretation of law in a manner that promotes the Bill of Rights and the constitution. No constitutional challenges were raised in the application, it said.

Both Basa and the LSSA argued that there is a gap in the NCA as it fails to provide for situations where consumers' circumstances change materially to the extent that they are no longer overindebted but are not able to settle all their debts.

This lacuna should be brought to the attention of the legislature, the LSSA argued, while Basa proposed amendments to the act and regulations.

The regulator argued that no lacuna exists and "to prevent abuse" it will issue another (non-binding) guideline with "strict rules" for debt counsellors to consider when assessing a consumer's claim that he or she is no longer overindebted.

Judgment was reserved.