One would think the banks would know what debts they are legally entitled to claim, and those they are not. But apparently many of them are still collecting on debts they are not legally entitled to – known as prescription debt.
Most consumer debt lies in contractual credit agreements such as gym memberships, store accounts, overdrafts, personal loans, payday loans and cellphone contracts.
If, as explained by Debt Rescue here, the credit provider has made no effort to secure payment, communicate with the client, or take legal action, the money owed becomes prescribed debt; it is regarded as having expired and can be legally written off.
It’s important to note that legal action can be served even if the person has not physically received notification of such action being taken; this can happen if, for example, a person changes their address and neglects to update their details with the credit provider.
The Prescription Act is however a wonderful law that every South African should spend a little time getting to understand.
Here’s a primer we ran in Moneyweb some years ago: How to deal with debt collectors
Independent legal specialist Leonard Benjamin provides a quick summary.
Prescribed (expired) debt isn’t payable
First, says Benjamin, understand the Prescription Act and the National Credit Act. In its simplest form, if a borrower defaults on a debt and three years has elapsed since the default, that debt is prescribed (expired) and therefore not recoverable. This applies to overdrafts, credit card and other debts (although in the case of mortgage debt or court judgment debt the prescription period is 30 years). However, the bank can keep the debit ‘alive’ by issuing summons within the three-year period after default.
Watch out for ‘prescription interruption’
Debt collectors will phone you and try to get you to admit that you owe the money (also called ‘interrupting prescription’).
They’ll get you on the phone and get you to verbally admit you took out a loan. If you admit to this, you’re cooked.
You have ‘interrupted prescription’ and kept the debt alive. Even if you feel a moral obligation to pay an old debt, never agree to it on the phone. The lesson in all this is never to communicate with debt collectors telephonically. Get them to put it all in writing.
Banking ombud weighs in
All this is relevant because of a new statement by the Ombudsman for Banking Services (OBS) that some banks are still trying to collect on prescribed debts to which they are not entitled.
“Unfortunately, in many instances, the protection afforded by the law is beneficial only to consumers who know about the legal principle as well as the ombud’s office. The majority of the public is left paying for debts that have prescribed and are therefore legally no longer collectable by creditors,” says Reana Steyn, the Ombud for Banking Services.
The Prescription Act is clear, adds Steyn. “Generally, contractual and civil debts will be extinguished if not paid or acknowledged as being owed to the creditor by the debtor for a period of three years from the date when the payment was due.”
The important part to note in the above sentence is the debt is extinguished if not paid or acknowledged.
Crafty lawyers and debt collectors know most people do not know about or understand the Prescription Act, so they will get you to acknowledge the debt on the phone. Benjamin advises never to talk to a debt collector on the phone. Only communicate in writing – but don’t ignore written communications either.
Between January 2021 and July 2022, the OBS received and investigated a total of 193 complaints relating to allegations of collections on prescribed debts by banks, resulting in more than R1 million being written off or repaid to complainants.
The OBS says it received 118 complaints in 2021, about a third of which involved banks flouting the law by collecting or attempting to collect on prescribed debts.
“In 2022, the OBS has to date received 75 of these matters. In 29% of these cases, banks have again been found to have transgressed the Prescription Act as well as the NCA [National Credit Act]”, says Steyn.
She adds that as recently as last week, an amount of R216 197 (the outstanding balance) was written off in one case and the complainant was also refunded the R3 200 which he had paid towards the prescribed debt.
Is it legal or illegal for creditors to collect on a prescribed debt?
This depends on whether the debt falls under the NCA or not. Credit agreements falling under the NCA include overdrafts, mortgage loans, personal loans, credit card debt and vehicle finance agreements.
If you default and do not acknowledge the debt for three years, this debt is prescribed. Your correct response to anyone phoning you for a prescribed debt is: “What are you doing phoning me for a debt you know is prescribed? What you are doing is illegal and I will report you and your company to the Banking Ombud.” Put down the phone without any further discussion. And then file a report with the Banking Ombud.
Prescription was written into the NCA, making it illegal for banks and other creditors to collect or sell a debt that has prescribed. That was a big leap forward for consumers, since this meant debtors no longer had to be aware of the law of prescription, nor did they have to raise this as a defence to be absolved from paying old debts.
“It is important for consumers to be aware of the fact that once they have acknowledged owing the debt, even if they have not made payment, they will not be able to successfully raise the defence of prescription in court should they be sued by creditors on prescribed debts,” says Steyn.
When is prescription interrupted?
According to the Prescription Act, the running of prescription is interrupted if, during the three years after the payment was due, the following happened:
- The debtor admitted, verbally or in writing, to owing the debt;
- The debtor made a payment towards the debt; or
- The creditor issued and served a summons on the debtor.
“If you are a bank customer and none of the above happened, and you receive a letter of demand from the bank or its lawyers for payment of a debt you believe has prescribed in law, you should raise prescription. If they continue to demand payment or take any other steps to collect the debt, you should log a complaint with the OBS,” advises Steyn.
She adds that while banks claim they have policies and systems in place to ensure that they do not breach the law and collect on prescribed debts, the OBS still regularly receives these kinds of complaints from bank customers.
Exceptions to the rule
Benjamin says there are exceptions to the NCA to bear in mind.
“Incidental credit agreements are a category of consumer agreements that don’t start out as credit agreements, and thus [aren’t] subject to the NCA, but are converted to credit agreements under certain circumstances, and become subject to certain sections of the NCA. Section 126B applies to incidental credit agreements.”
An incidental credit agreement is defined as:
“an agreement, irrespective of its form, in terms of which an account was tendered for goods or services that have been provided to the consumer, or goods or services that are to be provided to a consumer over a period of time and either or both of the following conditions apply:
(a) a fee, charge or interest became payable when payment of an amount charged in terms of that account was not made on or before a determined period or date; or
(b) two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date.”
For example, you go the dentist and get presented with a bill that must be paid on the spot. This is not a credit agreement.
However, it will become an incidental credit agreement if an arrangement to stagger payment is made, and interest is applied for the late payment. In this instance, the rules of prescription relating to the debt will be as described in the NCA.
This should not be an excuse to duck valid debts, but it is clear that banks are unlawfully collecting far more prescribed debt than the OBS figures suggest. And that needs to be stopped.