Court lays out the path for exiting debt review

A recent judgment by a full bench of the Johannesburg High Court paves the way for thousands of consumers under debt review to rehabilitate themselves. The judgment is good news for those who went under debt review without a magistrate making it an order of court.

Provided they have settled their short-term debt obligations, but not their mortgage or other long-term debts, they can ask their debt counsellors to issue a so-called clearance certificate and have their credit records sanitised at the credit bureaus.

This means they can once again access the credit markets.

Read: Mounting credit card debt: A financial horror story

And: Too many South Africans are slaves to debt

But for others with a magistrates’ court order placing them under debt review, the path to redemption is more arduous. The National Credit Act introduced the concept of debt review to assist overindebted consumers and to freeze any legal action against them. However, they are shut out of the credit market until released from debt review.

The applicants in the case were Hermanus Janse van Vuuren and Fabrian Nel; both are consumers who ended up under debt review but whose circumstances changed, allowing them to service their original credit agreements.

Their debt counsellor, however, refused to issue them clearance certificates so they decided to seek clarity from the court.

According to the court papers, Van Vuuren applied for debt review in 2015. A year later his financial position had improved to the point where he could repay his creditors on the original terms of the agreements, without relying on the relaxed repayment schedule allowed under debt review.

Van Vuuren asked his debt counsellor, Neil Roets, to take the necessary steps to release him from debt review. Roets refused, replying that he could not issue a clearance certificate, nor could the magistrates’ court release him from debt review. His only avenue of relief was to approach the high court.

Fabrian Nel also applied for debt review in 2016, also with debt counsellor Roets, who notified debtors and credit bureaus that Nel was overindebted. The difference in Nel’s case was that no order was ever made by a magistrate, though Nel maintained his repayment schedule as agreed with the debt counsellor. In July 2017, Nel voluntarily withdrew from the softer debt review repayment schedule and resumed payments to creditors in terms of the original agreements.

Both Nel and Van Vuuren argued that they were trapped in debt review despite their ability to assume normal repayments.

This had the effect of barring them from accessing further credit, despite their evident ability to repay their loans. The key benefit of going under debt review is that any legal action against the overindebted consumer is stalled.

The Banking Association of SA (Basa), the National Credit Regulator, the Law Society of SA and debt counsellor Michelle Barnard were admitted as friends of the court.

The respondents were Neil Roets, RCS Cards, Edcon, Standard Bank and Tenacity Financial Services.

Jurisdiction

The respondents argued that the high court had no jurisdiction to release Nel and Van Vuuren from debt review.

The high court examined the different ways a consumer may enter debt review: when a consumer voluntarily approaches a debt counsellor, or when a creditor leans on a credit agreement when a consumer claims reckless lending or overindebtedness.

The National Credit Act (NCA) has been widely criticised for poor wording, and a full bench of the high court had to wade through its arcane language to determine whether the applicants’ cases had merit.

The NCA allows a debt counsellor to issue a clearance certificate when the consumer has settled all obligations covered by the debt review, or shows they are able to cover future liabilities – including mortgage or other long-term obligations – provided other credit agreements have been settled in full.

The purpose of this clause is to allow a consumer to exit the debt review process once shorter-term debts have been settled, but without having to pay up a 20-year mortgage bond or other long-term debt.

If a debt counsellor decides not to issue a clearance certificate, the consumer can approach the Consumer Tribunal for a decision. The tribunal can then order the debt counsellor to issue a clearance certificate, which must then be distributed to the credit bureaus and the National Credit Register.

Conflicting clauses

Basa pointed out that there are conflicting clauses in the NCA, which allow a consumer to exit debt review but still be frozen out of the credit market.

There is also conflicting case law around debt review. The full bench of the high court rejected the argument that the high court had jurisdiction to release consumers from debt review. The magistrates’ courts and the Consumer Tribunal, with recommendations from the debt counsellor, are the only routes available to consumers.

Consumer lawyer Leonard Benjamin says “as with many of the matters involving interpretation of the NCA, the issue is so self-evident that it is difficult to understand why it reached a point that needed a full bench judgment.

The judges made no order as to costs.

Makes debt review even more unattractive

“As I see it, the import of the judgment makes debt review even more unattractive than it already is and makes it more likely that credit providers will withdraw from the debt rearrangement in terms of Section 88(3) of the Act.

“The way to get out of debt review when there was no order [by a magistrates’ court] was to get the application set down after supplementing it with new facts that show that you are no longer overindebted, but historically magistrates would dismiss the application. I think this was why this matter ended up before the court, as the debt counsellor refused to issue the clearance certificate.

“The value of the judgment is that there was previously great uncertainty regarding the exiting of a debt rearrangement order. In some cases, the route followed was to rescind the judgment by showing ‘good cause’, but it was hit or miss.”

How to exit debt review

The judges ruled that the High Court had no power to release consumers from debt review. In Nel’s case, though his debt review has not been made an order of court, his debt counsellor will have to approach the magistrate with the facts of his changed financial position and the magistrate “must conclude, logically, that Nel is no over-indebted,” reads the judgment.

Van Vuuren’s case is different because he went under debt review by way of a court order. In his case, the debt counsellor must issue a clearance certificate. If the debt counsellor fails to do so, he must approach the Consumer Tribunal, which can then instruct the debt counsellor to issue a clearance certificate. The judges found that no court can order a release from debt review.