Debt intervention: South Africa’s National Credit Amendment Act enacted but not yet in force

South Africa’s President signed the National Credit Amendment Act (Amendment Act) into law on Thursday, August 15, 2019. A commencement date has not yet been fixed for the Amendment Act. The Amendment Act will provide additional protection to low-income consumers from over-indebtedness by either re-arranging, suspending or extinguishing (partially or wholly) their unsecured credit debts during a period of four years from the commencement date, which can be extended. The main purpose the Amendment Act is to make an alternative insolvency measure available to a specific group of low-income consumers who do not have sufficient income or assets to justify sequestration, and to avoid the unaffordable costs that a low-income consumer has to incur when applying for an administration order or debt review. The Amendment Act applies to all credit agreements concluded before the commencement date excluding credit life insurance costs and the offences and penalty provisions contained in the Amendment Act that apply after the commencement date.

The Amendment Act has also tightened up the enforcement provisions to curb abuse of consumers by unscrupulous lenders and has imposed mandatory credit life insurance on all credit agreements for longer than six months but no more than R50 000 in value to prevent low-income consumers from falling into over-indebtedness due to changes in their financial circumstances that can be insured.

The concept of debt intervention is not bad in principle but there are many consequences for what is proposed. For example, the Amendment Act may (i) restrict the supply of credit to low-income consumers, (ii) create the impression to low-income consumers that they can spend as much as they can with the hope that their unsecured credit debt will be suspended and written off, (iii) be seen as a replacement to the current debt review process, and (v) it applies to existing credit agreements that were entered into without taking the debt intervention into account. Credit providers will need to take active steps in the debt intervention process, carefully assess the risk of loans being written off if the debt intervention process is embarked upon by a low-income consumer, and consider whether the Amendment Act amounts to an unconstitutional deprivation of their property, or whether the powers afforded to the National Consumer Tribunal (Tribunal) and Minister are unconstitutional. It is unclear why the existing debt review process was not enhanced to protect the low-income consumers and whether the National Credit Regulator (Regulator) and Tribunal has the resources to deal with a significant influx of debt intervention applications.

A consumer who (i) owes their credit provider a total unsecured debt of up to R50 000 under all their unsecured credit agreements, (ii) receives no income or received a gross income of R7 500 on average for six months preceding the date of their debt intervention application, (iii) is over indebted due to a change in personal circumstances or other circumstances and (iv) is not sequestrated or subject to an administration order, will be recorded as a debt intervention applicant. If these set criteria are met, consumers will be entitled to apply to the Regulator to re-arrange their unsecured debt within a period of five years or such longer period as may be prescribed by the Regulator.

To the extent that a low-income consumer’s debt cannot be re-arranged due to the fact that the income and assets of the consumer is insufficient to achieve a debt re-arrangement, the Regulator may recommend that the Tribunal suspends all capital, interest and fee payments under their qualifying credit agreements, in part or in full for 12 to 24 months and require the consumers to attend a financial literacy programme. The Tribunal must take into account, a whole host of specified factors before suspending a credit agreement. These factors include whether the consumer is a disabled person, a minor heading a household, a woman heading a household, an elderly person or whether the person has ever applied for debt review or for an order of sequestration or has previously had a debt extinguished by an order of a court or the Tribunal.

The Amendment Act also places an obligation on the Regulator to review the financial circumstances of the consumer eight months after a suspension order has been handed down by the Tribunal to determine whether the consumer then has sufficient income or assets to allow for the obligations of the consumer to be rearranged.

It is only after about 16 months, following the order of suspension, that the Tribunal can consider extinguishing in whole or in part, the consumer’s unsecured debt owing to his/her credit providers. The consumer will not be able to apply for any credit within 12 months of the order handed down by the Tribunal. Consumers who take part in the debt intervention process may not intentionally submit false information related to debt intervention to the Regulator or alter their financial circumstances in order to qualify for debt intervention because this is an offence under the Amendment Act. The Minister also has the right to change the gross income and total unsecured debt thresholds, which has caused a huge uproar in the credit market.