ONE of the clauses in the National Credit Amendment Bill, which is due to be signed into law by President Jacob Zuma shortly, will have a significant effect on the way debt is collected and passed on.
The law will prohibit the sale by credit providers of prescribed debts arising from credit agreements. Periods of prescription differ for different types of debt, but for credit agreements it typically lasts for three years. The sale of debtors’ books is a common practice among businesses, which see it as a more profitable alternative to writing off bad debts.
The bill will also prohibit the collection of prescribed debt where the consumer raises the defence of prescription, or would have done so if aware such a defence existed.
Department of Trade and Industry deputy director-general Zodwa Ntuli says the aim of the amendments is to prevent the harassment of consumers by debt-enforcement agents wanting to collect debts that have expired under the Prescription Act by getting consumers to acknowledge the debt.
By acknowledging the debt, prescription is interrupted and the consumer is obliged to pay.
Ms Ntuli says many complaints are received about this practice and the bill is intended to protect consumers from “extensive abuse”.
Neil Roets, CEO of debt counselling company Debt Rescue, says that under the Prescription Act some types of debt are prescribed and not liable for payment if in the prior three years there was no acknowledgment of the debt, no payment and no summons. However, if approached after the expiry of this period for repayment, the onus is on the consumer to raise prescription as a defence.
“By making use of blatantly unethical methods to get indebted consumers to acknowledge that they still owe the money, debt collectors hound consumers for debts. It is usually only when we dig into the various debts that debt collectors claim are still outstanding, that we discover many of these debts had prescribed,” Mr Roets says.
He says the new act will also put an immediate stop to banks and microlenders selling prescribed debt to specialised debt-collection firms at a discount, a process he says has grown into a huge industry. “These companies — some of which are listed on the JSE — let loose a barrage of threatening letters, midnight phone calls from debt collectors and endless e-mails threatening consumers with a variety of penalties. Under the new legislation, this will be totally outlawed and prescribed debt will no longer be a tradable commodity.”
However, the Association of Debt Recovery Agents (Adra), which represents registered debt collectors, strongly objects to what it says is a gross misrepresentation of the industry.
Adra vice-president Marius Jonker says “creating a false image of debt collectors by depicting the industry as one of widespread abusive practices is unacceptable”.
Mr Jonker says Adra is not opposed in principle to the prohibition on the recovery of proven prescribed debt, but opposes the shifting of the onus onto the credit provider or debt-enforcement agent to determine whether a debt has in fact prescribed, rather than waiting for the consumer to raise this defence.
This is an unrealistic expectation, he argues, as the information needed to make such a determination is not always available and often requires an investigation of the consumer’s conduct.
“The reality of the amendment is that, should a court rule in favour of the consumer on a question of prescription, the credit provider is exposed to a maximum penalty of R1m or 10% of its annual turnover, whichever is the greatest,” Mr Jonker says.
The severity of this penalty would dissuade credit providers and debt enforcement agents from seeking relief from the courts, as is their constitutional right, he says. They would probably opt rather to write off debt even if it were found on investigation not to have prescribed. “Adra is in favour of the onus remaining on the consumer to raise the defence of prescription,” Mr Jonker says.
Adra also believes the amendments will lead to more aggressive pursuit of outstanding debt in the courts before prescription takes effect. This could clog up the judicial system and add to the cost of debt collection. Once judgment was obtained, the period of prescription would extend to 30 years.
Deputy credit ombud Reana Steyn also warns that the bill may make creditors more aggressive. “There is a likelihood we could see a flood of judgments to ensure debts are collected before they prescribe,” she says.
Adra believes the proposal will hit municipalities hard as it will apply to their large outstanding debts for water and electricity accounts, which are subject to the National Credit Act. “If a substantial percentage becomes irrecoverable (as a result of) the proposal, service delivery will naturally deteriorate further,” Mr Jonker says.
The inability of businesses to recover outstanding debts will add to their cash-flow problems and threaten their survival.
Banking Association of South Africa MD Cas Coovadia says the banking industry has had no reason to quantify the debt sold to debt-collecting agencies so it is unable to estimate the size of the sector.