Judge questions debt counselling procedures

A recent High Court ruling questions the validity of a computer-based debt restructuring program the credit regulator insists debt counsellors use. It also holds a debt counsellor liable for the legal costs after creditors challenged the counsellor’s plan

A High Court judge recently dismissed as “irrational” a debtrestructuring plan drawn up by a Mpumalanga debt counsellor who followed a computer-based program accredited by the National Credit Regulator (NCR).

The judge’s finding in favour of two banks against the debt counsellor’s plan highlights the need for the debt restructuring plans to work for both debtors and creditors, the need for over-indebted consumers in debt counselling to sell assets and, controversially, suggests debt counsellors stand in line with other creditors to be paid.

In addition, debt counsellor Michelle Barnardt was held liable for the legal costs for the appeal hearing and for the magistrate’s court hearing after she followed the rules the NCR is insisting debt counsellors use to restructure the debts of her client, Mr C.

This despite the fact that debt counsellors are regarded as fulfilling a statutory role and, in terms of a 2009 declaratory order obtained by the National Credit Regulator, should not ordinarily be held liable for costs.

Barnardt’s restructured debt plan was approved by a magistrate’s court and accepted by all the creditors except First National Bank and Nedbank.

The banks took the plan on appeal to the Gauteng North High Court. Judge Neil Tuchten upheld the banks’ appeal, saying they had cause to question whether Mr C had a right to keep the house and cars for which he could no longer afford to pay.

A growing number of debt counsellors, including Barnardt, are Debt counsellors’ fees and other costs should not be given preference at the expense of other creditors, a High Court judgment says.

In a case brought by FirstRand Bank and Nedbank against debt counsellor Michelle Barnardt over her plan to restructure the debts of Mr C, Judge Neil Tuchten took issue with the fact that the payments to creditors were postponed until all debt counselling fees and legal fees were paid by Mr C.

Judge Tuchten says the National Credit Act does not allow a debt counsellor to seek to have his or her fees and expenses preferred to those opposed to using the NCR’s programs to create debt-restructuring proposals. They say these programs and the “guidelines” set by the regulator and the credit industry are not law and put them in breach of their fiduciary duty to their clients.

Although the judgment was handed down in the Pretoria High Court and has reference in that jurisdiction only, it has implications for all debt counsellors and consumers in debt counselling.

Mr C had not defaulted on his debt repayments, but Barnardt found he was over-indebted and could not meet all his financial obligations.

In terms of the National Credit Act, when you are found to be overindebted, a debt counsellor must rearrange your obligations and refer the payment proposal to a magistrate’s court to make it a court of the creditors and the consumer.

“A debt counsellor may, however, make provision for her own fees and expenses in specified amounts to be paid by instalments ranking equally with the consumer’s other creditors.”

Deborah Solomon, the founder of the DCI portal for debt counsellors, says the NCR’s fee guidelines have been in place for eight years and they are still only a guideline rather than regulation, so the judgment handed down by Tuchten was “was bound to happen”.

Solomon says the simple solution is for the minister to pass the fee guideline as a regulation. order. Debt counsellors typically send proposals to creditors and negotiate with them before referring the payment plan to court.

Barnardt proposed that Mr C’s FNB home loan instalment be restructured from R9 310 to R5 500 a month and the interest rate remain at 7.4 percent.

FNB objected to the inclusion of the home loan in the debt restructuring, contending that the property should be sold and Mr C made to rent or buy a cheaper property.

Barnardt also proposed that Nedbank’s vehicle finance instalment be reduced from R5 700 to R1 500 a month, effectively extending the term (originally over 72 months) by almost three years. Barnardt proposed reducing the interest rate from 15.75 percent to 10 percent, but the magistrate refused this.

Nedbank objected to the finance agreement being restructured because extending the term of the vehicle finance agreement exposed the bank to the risk of the car depreciating to a value that would be less than the amount owed to the bank.

THE JUDGMENT

Judge Tuchten says Barnardt’s proposal called on the magistrate’s court to reduce the interest rate applicable to one of the Nedbank debts. The court has no power to do this, the judgment says, despite the fact that the NCR’s guidelines recommend that debt counsellors do this.

The judge also said the Mr C had three cars (including the vehicle financed by Nedbank).

“It is difficult to understand why the court below 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 said.

Similarly, the judge said FNB’s contention that the property should be sold was not without merit, and the evidence before the magistrate’s court did not allow for the debt review proposal to supersede FNB’s contractual rights as a creditor.

Barnardt says the judgment shows that the guidelines for debt counsellors to use when producing proposals, which were developed by the regulator and the credit industry, “do not stand up in court”. They are no substitute for the law - the National Credit Act (NCA), she says.

The regulator is duty-bound in terms of the NCA to refer issues regarding the interpretation of the law to court for a declaratory order.

Deborah Solomon, the founder of the DCI portal for debt counsellors, says the judgment is a wake-up call for the debt counselling industry.

“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,” she says.

Stephen Logan, an attorney who specialises in credit law, says the judgment makes it clear that the assets of the consumer may have to be sold to reduce their indebtedness.

“Given the many cases where proposals are made that do not seek to reduce liability through the sale of appropriate assets, this is a key aspect that should be welcomed by all stakeholders. Fairness to both the creditor and the debtor in such debt review proceedings is necessary, and unworkable proposals that favour the consumer at the expense of the reasonable expectations of creditors should not be made or granted by a court.”

But Lesiba Mashapa, the company secretary at the NCR, says the courts need to be flexible when considering the restructuring of proposals. “Where there is a disagreement between the debt counsellor and a credit provider on the payment amount, the court should determine the amount,” he says.

Mashapa says the judgment “effectively allows the banks to repossess a home and car and sell them. It is possible that the sales might not realise enough money to repay the debt, and the consumer will still be liable for the shortfalls. This will still not solve the consumer’s over-indebtedness.”

COSTS ORDER ‘A WORRY’

Mashapa says the cost order the judge made against Barnardt will deter debt counsellors from fulfilling their statutory responsibilities and making recommendations to the court to resolve consumers’ over-indebtedness.

Logan says the costs issue is a critical one. He says debt counsellors and and consumers should not generally be held liable for costs when restructuring proposals are sound and achieve the intention of the NCA.