With the COVID-19 pandemic still wreaking havoc, it is not exactly clear when we will wave the last wave goodbye. All indications are that South Africa officially entered the fourth wave around the beginning of December, with talk abound that the government may consider stricter lockdown measures to contain the new variant (omicron).
Since the advent of the pandemic at the beginning of 2020, businesses have struggled to stay afloat with thousands having to take the difficult decision of closing shop. This saw scores of employees being thrown out of jobs, whilst some of those who were lucky enough had to put up with reduced working hours and remuneration.
In a policy statement in July 2021, the former Minister of Finance, Tito Mboweni, made an indication that the economy may return to pre-Covid levels around 2023. This is telling, of the economic doldrums that Covid-19 has caused across the entire spectrum.
The most effects have had to be felt by those who woke up without jobs. Without a stable monthly income to finance monthly expenditure, it has indeed been a difficult time for most. The South African credit market is quite substantial as an industry, and for it to thrive there must be a healthy balance between borrowing and repayment patterns. This balance however, has been difficult to maintain through the pandemic as substantial credit consumers were left with depleted incomes. Naturally, this resulted in repayment of credit facilities seeing huge challenges.
Debt Review was introduced by the National Credit Act 34 of 2005 (the Act), as a mechanism to assist credit consumers who are overindebted. Its processes are aimed at the rehabilitation of impaired credit records/profiles, so that overindebted credit consumers may regain their financial wellbeing to achieve financial freedom in future.
The Act assists in this manner by discouraging what it terms as reckless lending (section 80), whereby a credit provider grants credit to a consumer who by all indications, will likely not be able to repay the credit. Therefore, credit providers run the risk of losing the repayment of the credit they grant if it shows that at the time the credit was approved, an assessment was not done or that the consumer had no prospects of repaying the debt.
We have come across instances where the concepts of debt review and debt restructuring are used interchangeably. While the form and purpose of the two are fundamentally similar, these two are different in a technical sense.
Debt Restructuring is an informal process whereby the debt obligations of the credit consumer are rearranged, to forestall them being overindebted. Debt restructuring may also be done for a consumer who is already overindebted, in the event that they require to avoid some of the effects of the more formal process of debt review. In Section 86 (7) (b) the Act provides that where the consumer is not overindebted but nevertheless likely to experience difficulty in repayment, the debt counsellor may recommend that the credit provider and the consumer undertake debt restructuring/rearrangement.
On the other hand, Debt Review is a formal process regulated by the Act which caters for credit consumers who are overindebted. After the debt rearrangement is done, a Court Order is usually sought to give effect to the rearranged debt. The consumer may not enter or withdraw at will, and the effects of the process are more binding than under debt restructuring.
A necessary question would be, what are these effects of being placed under debt review?
Firstly, the credit consumer who has been placed under debt review will have no access to further credit. Upon application of debt review, a flag to reflect such application is placed on the credit profile of the consumer, which profile appears at credit bureaus. The credit providers are also notified to this effect by the debt counsellor, who will request certificates of balances (COBs) from each credit provider to undertake the financial assessment. As it is aimed at rehabilitating the overindebted consumer, not having access to credit will ensure that all efforts and available financial resources are directed towards redeeming the impaired credit profile of the consumer.
Secondly, an overindebted consumer who is placed under debt review is protected from legal action. However, enforcement of a credit agreement where the provider had initiated Section 129 proceedings before the consumer applied for debt review, may be stalled by inviting the credit provider to be part of the debt rearrangement.
Thirdly, the process of debt review requires that the debt counsellor undertake a financial assessment of the consumer and as part of the debt rearrangement, essential living expenses will be subtracted before the residue is distributed to the creditors towards the debt repayment. This makes it easier for the consumer in that their subsistence is catered for each month, whilst at the same time their debt obligations are being fulfilled.
Upon the issuing of a Clearance Certificate by the debt counsellor, the consumer will be removed from debt review and will be eligible for further credit if so required. Removal from debt review may only be achieved once all debt obligations under the rearrangement have been settled in full (with the exception of a long-term credit facility), or where the consumer withdrew before being declared overindebted by the debt counsellor. In the case of Van Vuuren v Roets And Others; Nel v Roets And Others (2019) ZAGPPHC 428 the Court held that it had no authority to remove a consumer from debt review where the debt obligations under a debt rearrangement structure have not been settled in full.
At Phoenix Bonds, we advise credit consumers who are placed under debt review, to be issued with a clearance certificate or a Court Order declaring that the consumer is not over-indebted, before applying for further credit. Credit providers are not permitted by law to grant credit to consumers who are under debt review. The credit profile of the consumer shows if a consumer is under debt review and the details of their debt counsellor.
We specialise in bond origination and bridging finance. We assist home buyers to find mortgage bonds that have favourable terms, thereby saving you time and saving you money.
The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.
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