Three years ago, Linda* and her husband went into debt review. Like so many young couples, the allure of easy credit led them to live a lifestyle they could not afford.
They bought a house and a car, bought clothes using store accounts and put an overseas trip on their credit cards.
As the repayment of their debts started to leave them with less to live on each month, they accessed further credit to keep afloat, including an overdraft facility with Standard Bank.
Eventually, the debt overwhelmed them. To protect their assets, they decided to go into debt review with debt counselling firm Octogen.
“It was in some ways a relief that we just had to make one payment and deal with one company, and all the bills were taken care of,” says Linda, who also acknowledges that it has been a powerful lesson to learn to live without access to any credit lines.
Linda and her husband believed all their finances were finally under control and that their short-term debts would be settled in two years.
But then Linda opened a bank statement one day. What she discovered horrified her.
Despite three years of payments, the couple had made virtually no inroads into their overdraft with Standard Bank.
She discovered that despite the bank lowering the interest rate to 1.8% a year on her overdraft, as per the debt counselling court order, the bank continued to charge exorbitant bank fees on her overdraft facility as well as her cheque account, which is not part of her overdraft facility, and was frozen and inactive.
Because her overdraft debt was inflated by monthly service charges on the cheque account, the balance of the combined Standard Bank overdraft and cheque account did not reconcile with the balance after payments on the monthly payment distribution account they receive from Octogen.
The statement, issued by Hyphen, a payment distribution agency employed by Octogen, showed that the couple only owed R4 500 on their Standard Bank overdraft, but their Standard Bank statement showed that the actual balance was R10 100.
An investigation showed that the difference between the two amounts was bank fees.
Each month, Standard Bank deducts R95 for the current account, R32 for the overdraft facility and R22 for credit life – R149 a month, or R5 364 over three years.
If this had gone to the debt as intended, Linda’s overdraft would be repaid already.
Standard Bank’s response to a query by City Press was that “the bank is entitled to all fees and charges still under the debt review status”, and that “the only option, therefore, is for the customer to approach his debt counsellor with a view to increase the payments”, despite the fact that access to the account is frozen.
Paul Slot, CEO of Octogen, says the continuation of fees is just one of several challenges facing the debt review process.
He says that while the National Credit Regulator provided some clarity on the new in duplum process embedded in section 103(5) of the National Credit Act, credit providers are still not coming to the party and will find ways to continue to charge overindebted customers.
*Not her real name
HERE IS WHAT YOU NEED TO KNOW ABOUT CREDIT PROVIDERS AND DEBT REVIEW, AND WHY YOU SHOULD NOT USE YOUR PAYMENT DISTRIBUTION AGENCY STATEMENT AS YOUR ONLY REFERENCE:
CREDIT PROVIDERS ARE ALLOWED TO CHARGE ACCOUNT FEES, SO NEGOTIATE THESE
1. While a credit provider has to adhere to a certain code of conduct when it comes to debt review, this only pertains to the debt itself, and the interest and fees associated with that debt.
It does not include account fees. In Linda’s case, Standard Bank waived the credit service fee of R57 a month and reduced the interest rate to 1.8% a year, but was entitled to continue to charge R149 a month in fees instead of closing the cheque account and placing the overdraft on a reducing balance only.
The only way this debt could be settled would be once Linda’s other debts were paid off and more money could be allocated to the Standard Bank account.
Despite raising the issue with Standard Bank, it decided not to amend or close Linda’s account while she is under debt review.
The debt counsellor missed an opportunity to negotiate with the bank around the fees at the time of applying for debt review.
The banks have different approaches to how they handle account fees, so upfront negotiation is best.
Absa, for example, does not have a specific policy on waiving fees, but “in the normal course of business within the debt review process, we assess each case on its merit in conjunction with the debt counsellor”, says Jan Moganwa, head of customer solutions.
FEES CAN EXCEED IN DUPLUM
2. As these fees are not considered part of the original debt, the rule of in duplum does not apply. The in duplum rule states that the fees and interest of the debt cannot exceed 100% of the value of the debt at the time of default.
However, as account fees are not applicable to the cost of debt, there is no limit and it can push the total repayment to more than 100% of the debt.
CREDIT PROVIDERS DO NOT ISSUE MONTHLY STATEMENTS TO DEBT COUNSELLORS
3. While the client should continue to receive monthly statements, these are not sent to the debt counsellor, which means that it cannot update or check the information.
It is important to open your individual account statements each month, and fully understand your financial position and the fees that are being charged.
The payment distribution agency only reflects the debt at the date of the court order (certificate of balance) and then each month deducts any payments made against that debt.
The court order is only for the outstanding debt at the time, plus future fees and interest, as agreed. If no agreement is in place, it is based on the contractual terms included in the court order.
YOUR PAYMENT DISTRIBUTION AGENCY STATEMENT WILL NOT MATCH YOUR CREDIT PROVIDER STATEMENT
4. During the process of applying for debt review, credit providers continue to add interest and fees.
Although the debt counsellor may have anticipated the fees and interest, and added this to the repayment, if payments are late or if the credit provider has added fees, this may mean that debt balance as per the payment distribution agency will be less than the balance in the books of the credit provider.
It is hard for the payment distribution agency to capture the absolutely correct value – the only truly accurate figure is the one issued by your credit provider.
CREDIT PROVIDERS CAN CALL IN DEBT AT THE END OF DEBT REVIEW
5. It is important to understand that the debt review court order is based on the certificate of balance obtained when debt review started. Once this debt is paid off, you can apply to exit the debt review, but the debt counsellors must check on your behalf if any additional balance is due to enable full repayment of the debt.
For example, the court order may stipulate that you owe your creditors R20 000 and you agree to pay this off at a rate of R500 a month over the next 40 months, but because of payment timing, some interest may be due for payment to the credit provider, or additional fees have occurred, such as in Linda’s case.
Slot says that, based on the existing practice, debt counsellors should facilitate the payment of the additional amount if justified and in line with the in duplum requirements in the National Credit Act.
If this is not done, the credit provider may commence with legal action because you are in effect in default.
A debt counsellor should contact all your creditors several months before debt review is due to end and understand the actual liabilities, and then negotiate to either increase the monthly payments or extend the term so that the customer knows that when they exit debt review, all their debts are settled.
Slot says the counsellor should also, at that stage, check that the credit provider has accurately applied the payments and has not added unnecessary costs.
EXITING DEBT REVIEW CAN CREATE A HOME LOAN SCARE
6. Although the terms of debt review require you to have paid off your short-term debt (including your vehicle) before you apply to exit, you can still have an outstanding home loan. Slot says they have had experiences where some credit providers want to reinstate the original home loan agreement.
In one case, the consumer was required to repay the home loan off in three months or the bank would take legal action.
This is against the intention of the National Credit Act and not supported by debt counsellors.
For this reason, and to protect the consumer, the debt counsellor will negotiate with the bank to come to an agreement in terms of the home loan to ensure that the repayments remain affordable – it is a lot easier to negotiate with a bank while you still have the protection of debt review.