Judge Exposes Flaws in NCR Debt Counselling Guidelines

Flawed Debt Counselling Guidelines

A significant High Court case between an Mpumalanga debt counsellor and two of the big banks has exposed the unreliability of the National Credit Regulator (NCR) approved debt counselling guidelines of a computer-based program, which prescribes how debt restructuring plans are to be drawn up.

A debt restructuring plan drawn up by debt counsellor (DC), Michelle Barnardt for her client was dismissed as “irrational” by Judge Neil Tuchten last week. Though the plan was approved by a magistrate’s court, First National Bank (FNB) and Nedbank refused to accept this, and so, lodged an appeal at the Gauteng North High Court.

The Judge felt it reasonable for the banks to question whether the client had a right to hold onto his assets, seeing as he could not afford to pay them off, and so upheld the appeal. Consequently, Barnardt is to cover the costs of both the appeal and the magistrate’s court hearing.

This, despite the fact that she was only following debt restructuring rules set by the NCR. What’s more, according to the 2009 declaratory order obtained by the regulator, as debt counsellors have a statutory role, they are not normally held liable for costs. This case emphasises the importance of debt restructuring plans being fair to both creditors and debtors.

The Creditor’s Rights

The case also calls into question the practicality of over-indebted consumers hanging onto expensive assets that they clearly cannot afford to pay off. As opposed to downgrading, living within their means, and repaying creditors the money they are owed. Barnardt’s client had three cars, including the car financed by Nedbank.

Judge Tuchten found it “difficult to understand why the court…found it appropriate to allow all three of these vehicles to remain in the consumer’s possession rather than be sold to reduce his over-indebtedness.” He also stated that FNB’s assertion that the client’s home should be sold was not unreasonable. The evidence presented to the magistrate did not justify the decision to put the debt restructuring plan before FNB’s rights as a creditor.

Who Gets Paid First?

The Judge found it problematic that the creditors’ payments were delayed until Barnardt’s debt counselling and legal fees had been paid by the client. Judge Tuchten clarified that debt counsellors’ fees should not be prioritised over payments to creditors. More and more debt counsellors are opposing to drawing up debt restructuring plans based on the NCR accredited computer-based program.

The rules on which the program is based are not laws. They are guidelines set by creditors and the regulator. Debt counsellors feel that by following these guidelines they aren’t acting in their clients’ best interests. As the ruling was made in the Pretoria High Court, it only applies to this jurisdiction for the time being. However, the judgment still has far-reaching implications for over-indebted consumers and debt counsellors across the country.

“Irrational” Debt Review Plan

After determining that her client was over-indebted, though not in arrears, Barnardt proposed that his monthly instalment for his FNB home loan be reduced from R9 310 to R5 500 and remain at an interest rate of 7.4%. Arguing that the client should rather sell his home, and rent or buy a more affordable property, FNB challenged the addition of the home loan to the debt restructuring plan. Barnardt also proposed that her client’s monthly Nedbank car finance instalment be lowered to R1 500 from R5 700.

As follows, the repayment term would be stretched out over almost 9 years, – 3 years longer than the original 6 year term. Nedbank objected to the car finance restructuring, arguing that an extension of the repayment term to 9 years meant the car would depreciate to a value lower than the amount owed to the bank.

Barnardt further proposed that Nedbank decrease the interest rate from 15.75% to 10% – which the magistrate declined. Judge Tuchten explained that the magistrate’s court does not have the power to lower interest rates. Even though the NCR’s guidelines advise that debt counsellors propose reduced interest rates as part of debt restructurings.

Wake-up Call for Debt Review Industry

Barnardt said the judgement showed that these guidelines don’t stand up in court and aren’t a substitute to the law. The NCR is obliged to apply to the court for a declaratory order, should it find inconsistencies with the interpretation of the NCA.

Founder of the Debt Counselling Industry (DCI) portal, Deborah Solomon feels the judgment is a wake-up call for the debt counselling industry, stating that “Computer programs can’t be used to generate proposals. No two consumers are alike. A debt counsellor has to apply his or her mind to the proposal and base it on the consumer’s unique set of circumstances.”