Debt review protects consumers but final court decision still pending

Key protections for South Africans who are in debt review to ensure they are neither unfairly advantaged by more favourable payment terms nor can they be charged excessive interest on what they owe hang in the balance due to ongoing court cases.

In a highly contested legal matter, the Banking Association South Africa (BASA) and five major banks- Standard Bank, FirstRand (which owns FNB), Nedbank, Absa, and Capitec- have launched an appeal against a ruling that offered more certainty and protection for credit-active South Africans who have fallen behind on their payments and turned to debt rescue for help.

The dispute began when Chantelle Scott, a registered debt counsellor, approached the North Gauteng High Court seeking clarity on the definition of “default” and whether the National Credit Act (NCA) limits this to the original credit agreements or extends it to debt review arrangements.

Scott also requested confirmation that while a consumer is in default, they cannot be charged interest, fees, and other costs that exceed the unpaid amount owed at the time the default occurred- even if the debt is being repaid under debt review. This is known as the in-duplum rule, which caps interest and other payments to the same amount as the principal or initial loan when someone is in default on a credit agreement.

The court ruled that a missed payment leading to default on a loan is not wiped clean simply because someone enters debt review. That default remains tied to the original agreement. Debt review changes how and when payments are made, it explained.

Importantly, the ruling confirmed that the in-duplum rule applies to people under debt review. Benay Sager, executive head of DebtBusters, explains that this means debt cannot spiral out of control, especially since it limits unfair collection practices.

Sager says the ruling will encourage people to use debt review mechanisms. “Consumers now know that using debt review will not worsen their financial liability under the National Credit Act, as there will be a cap applied to how much they would owe even if they chose debt review.”

However, Sager cautions that, as the matter is under appeal and may go as far as the Supreme Court of Appeal, consumers will not yet benefit from the ruling. If the decision stands, DebtBusters believes it will offer a clearer and more precise definition of “default,” affirming that it remains linked to the original contract and is not affected by subsequent debt management actions.

The judgment noted the circumstances leading to the introduction of the NCA were because the credit industry was “characterised by discrimination, a lack of transparency, limited competition, high costs of credit and limited consumer protection”.

The judge also said: “The levels of consumer over-indebtedness had spiralled out of control.”

According to Rynhardt de Lange, Director and Head of Legal at Milaw Legal, household debt is more than a “staggering” R2.56 trillion, with over 717,000 South Africans currently in debt review. As a percentage of credit-active South Africans, that is almost 4%.

DebtBusters' latest annual Money-Stress Tracker, now in its fourth iteration, found that 70% of respondents have felt money stress this year, which, although an eight-percentage-point decrease since 2023, is still a worrying picture. 

The ruling explained that the NCA envisions the debt contained in the original credit agreement to be gradually paid off over a specified period. The credit transaction specifies a principal debt, interest rate, fees, and repayment term, with monthly payments designed to bring the balance to zero at the end of the term.

If a consumer falls behind on monthly payments, they are in default under the original credit agreement and may apply to have their repayment obligations rearranged, the court indicated. The ruling described this as an “arrangement or plan to bring the payments under the original credit agreement up to date”.

Importantly, TransUnion points out that non-bank personal loans saw the highest delinquency rate since the previous high point in the second quarter of 2021.

TransUnion’s first-quarter industry insights report, the latest available, found that more money was loaned out in the form of credit cards and car loans than in the same period in 2024. Ayesha Hatea, director of research and consulting at TransUnion, says on its website that “South Africans are increasingly turning to low-value personal loans with shorter repayment terms to manage their monthly expenses”.

However, the court emphasised that such an arrangement does not create a “clean slate” for the consumer – a point BASA had contested. Consumers who comply with their obligations under the reworked agreement are protected from legal action, a bench of three judges stated.

The judge rejected BASA’s argument that debt review provides an unfair advantage because consumers can choose to enter debt review. The ruling stated: “The consumer who exercised their right should not be disadvantaged and treated differently from those who have not exercised this right. The purpose of the NCA is to protect consumers from having to pay more than what they would have paid had they not entered debt review or re-arrangement.”

Despite this, the decision is currently suspended due to BASA’s appeal, which argues that the decision negatively impacts consumer access to credit. Business Report quoted BASA’s legal papers as saying the ruling has “several unintended consequences” and results in “insensible and unbusinesslike” outcomes.

 During the debt review process, consumers cannot access additional credit.

PERSONAL FINANCE