A Reasonable Argument: The Legalities of Debt Review vs. Credit Agreements

In the intricate world of personal finance, the conversation surrounding debt review often centers on its perceived restrictions and the notion of it being a “legally binding agreement”

However, this perspective frequently overlooks the broader context of the National Credit Act (NCA) and the legal implications of credit agreements themselves.

In this article, written by Nadia de Weerdt, head debt counsellor at Sandton Debt Counselling, we will have a look at the nuances of debt review, its legal standing, and how it may serve as a protective measure against the more severe consequences of payment delinquency (partial, missed or late payments = payment delinquency) 

Debt review is a process designed to assist over-indebted consumers in managing their financial obligations. Under the NCA, consumers can approach a debt counsellor to assess their financial situation and if found to be in a state of financial distress, apply for the debt review process.

This process allows a debt counsellor to restructure the debts in a way that is manageable and sustainable for the consumer.

While it is true that debt review comes with certain restrictions—such as limitations on obtaining new credit—these measures are intended to encourage responsible financial behavior and ultimately lead to a healthier financial state.

It is critical to recognize that credit agreements themselves are also legally binding. When consumers enter into a credit agreement, they are committing to repay the borrowed amount under the terms specified.

The NCA outlines the rights and responsibilities of both creditors and consumers, emphasizing the importance of adhering to these agreements. Failure to do so can lead to extremely severe consequences, including harsh legal action, asset repossession, and even imprisonment in cases of fraud.

It is essentially quite easy to forget the 30 odd pages of terms and conditions one agrees to when opening a bank account. Even without debt linked to a simple savings account, it is still a legally binding agreement. Therefore, any institution that argues all these negatives of debt review being a legally binding agreement, is in fact perpetuating a fallacy of logic.

Legally binding agreements are designed to protect the rights, responsibilities, and obligations of all parties involved. Having a formal contract in place serves to benefit and protect each party. For instance, if everyone dismissed the idea of signing a rental agreement simply because it is a legally binding contract, the implications could be quite concerning.

The NCA is primarily focused on addressing payment delinquency and the repercussions that arise from it. When consumers default on their credit agreements, they expose themselves to a range of punitive measures.

These can include:

• Legal Action: Creditors may initiate legal proceedings to recover outstanding debts, leading to court judgments against the consumer.

• Asset Repossession: In cases of secured loans, creditors have the right to repossess assets, such as vehicles or property, to recover their losses.

• Credit Bureau Listings: Defaulting on payments can result in negative listings on credit bureaus, severely impacting a consumer's credit score and future borrowing ability. 

Given these potential outcomes, it becomes clear that the consequences of failing to manage debt can be far more severe than the restrictions imposed by debt review.

Some may argue that debt review serves as a “legal loophole” that allows consumers to sidestep the harsh realities of credit agreements. However, this perspective fails to acknowledge the purpose of debt review as a rehabilitative measure. Rather than viewing it as an escape route, it is more accurate to see debt review as a structured pathway to financial recovery.

Additionally, consider the creditors who extended those debts. If one were permitted to enter a debt review program while simultaneously accumulating additional debts, would this not undermine and disrespect creditor rights?

It would be akin to purchasing a home with funds "saved" from only making partial rent payments to a landlord.

The advantages of debt review for consumers in financial distress significantly outweigh these perceived drawbacks, as creditors are willing to negotiate and possibly accept lower installment payments and interest rate reductions to assist consumers, as (creditors) too are required to adhere to the regulations of debt review, ensuring a fair process for all.

By entering debt review, consumers are not avoiding consequences; they are actively engaging in a process that prioritizes their long-term financial health. The restrictions imposed during this period are designed to prevent further financial strain and encourage responsible spending habits.

The analogy by certain credit providers of being “chained to debt in an actual prison cell” versus “house arrest during rehabilitation” aptly illustrates the difference between unregulated debt accumulation and the structured environment of debt review.

While access to credit may seem like a form of freedom, it often leads to a cycle of stress, anxiety, and financial instability. In contrast, debt review provides a framework that allows consumers to regain control over their finances while working towards a debt-free future.

In this sense, the restrictions of debt review can be viewed as a necessary form of “house arrest” that facilitates rehabilitation. It encourages consumers to focus on their financial recovery without the temptation of accruing additional debt, ultimately leading to a more stable and secure financial future.

Legally binding agreements are established to safeguard the rights, responsibilities, and obligations of all parties involved. Implementing a formal contract benefits and protects each participant.

This principle also applies to both credit and debt review processes.

Therefore, some credit providers who express alarm regarding debt review, labeling it primarily as dangerous due to its "legally binding status", may want to reflect on their underlying motivations for such claims. Debt review is only dangerous in the hands of unscrupulous individuals or those not fit to call themselves Debt Counsellors to begin with.

While  the conversation around debt review often highlights its restrictive nature, it is crucial to consider the broader implications of credit agreements and the potential consequences of payment delinquency. Debt review is not a payment holiday or a legal loophole; it is a structured approach to financial rehabilitation that prioritizes the long-term well-being of consumers and their ability to repay debts to creditors and rejoin the credit market.

By understanding the legalities and the purpose of debt review, individuals can make informed decisions about their financial futures and navigate the complexities of debt with greater confidence.