Prescribed Debt: What You Should Know About It in South Africa
Have you ever received an unexpected demand for payment, be it through a phone call, email, or a letter, regarding an old debt you believed to be long forgotten? If so, you’re certainly not alone in this experience.
What if I informed you that you might be pressured to settle a “prescribed debt,” a debt that you’re no longer legally obligated to pay? It may sound unbelievable, but it’s a fact. Find out more about prescribed debt and how to handle it below:
What Is Prescribed Debt?
Prescribed debt is debt that the lender can no longer collect because it has gone beyond its “expiry date.” Once a debt becomes prescribed, you’re no longer legally obligated to repay it.
The concept of debt prescription varies by country and the type of debt in question. In South Africa, Prescription Act No. 68 of 1969 and the National Credit Act of 2005 (NCA) are the main governing laws that regulate debt prescription.
Debt can become prescribed over a period of 3 to 30 years, depending on the kind of debt. For instance, the prescription period of personal and credit card debt is three years.
Prescribed debt doesn’t mean that your debt has been forgiven; you’ll still owe your creditor. However, the lender loses the legal authority to collect the debt.
Should you make payment toward prescribed debt, you would have acknowledged and accepted that you owe the creditor. As such, you’d have reset the prescription period and revived the creditor’s legal rights to collect the debt.
What Is the Prescription Act No.68 of 1969?
The Prescription Act of 1969 is a crucial piece of South African legislation designed to regulate the prescription of debts. It delineates the timeframe within which lenders can pursue legal action to compel borrowers to repay their debts.
This act governs debt such as personal loans, commercial loans, judgmental debts, credit card debt, mortgages, and promissory notes.
The Prescription Act benefits both lenders and borrowers. For borrowers, it constrains the time period within which a lender can legally pursue them for repayment. Once a debt becomes prescribed, the creditor loses the legal power to enforce it.
Lenders need to be mindful of the prescription period specified by the act, ensuring they initiate legal action within the prescribed timeframe to recover the debt. Failure to do so results in the debt becoming unenforceable.
When Is Debt Classified Prescribed?
For debt to be prescribed, specific conditions must be met. The requirements include:
- Time limit: If your lender doesn’t contact you within a given period, and this lack of communication isn’t due to your relocation or a change of contact details, the debt in question may be prescribed. Otherwise, if your lender can prove that they communicated with you within the prescribed time frame, you’ll remain obligated to repay the debt.
- No legal action taken: Your lender shouldn’t have initiated any legal action to claim the debt within the prescribed time period.
- No acknowledgement of the debt: You shouldn’t have made a written or verbal acknowledgement of the debt during the prescribed period.
Let’s make this clearer with an example. Suppose you borrowed money for personal use from a lender in 2019 and signed an agreement to repay the debt within three years. Due to personal circumstances, you were unable to make any payments.
After three years, the debt could become prescribed if there was no contact, no legal action taken, and no acknowledgement of debt made verbally or telephonically.
This means the lender is now prohibited from taking any legal action to compel you to repay the debt, and you’re no longer obliged to repay it.
What Is an Acknowledgement of Debt?
An acknowledgement of debt (AOD) is a legally binding agreement between a borrower and a lender. In this agreement, the borrower explicitly acknowledges the existence of a debt, its amount, repayment schedules, and the consequences of defaulting on the agreement.
By signing the AOD, a borrower confirms their indebtedness to the lender. While the benefits of the AOD agreement are primarily in favour of the lender, there are advantages for the borrower as well.
From the borrower’s perspective, signing an AOD can improve their credit ratings. Demonstrating a willingness to enter a formal agreement and fulfilling debt obligations can build a positive credit history, enhancing future borrowing opportunities.
The AOD also clarifies whether you’re indebted and allows for effective financial planning. This can prevent unnecessary fees or legal actions due to non-payment.
For lenders, the AOD offers legal proof of a debt’s existence, reducing the risk of defaults and misunderstandings. It also provides a legal framework for addressing issues and reinforces legal protection.
Transparency in terms, such as interest rates and repayment schedules, ensures both parties have a clear understanding, minimising the risk of conflicts.
It’s essential to exercise caution before signing an AOD. Review its terms and conditions and seek legal advice if there’s lack of clarity. Signing an AOD without a clear understanding can have lasting financial implications and potentially disadvantage you.
While prescribed debt can relieve you from legal obligations, there may still be some consequences to navigate.
What Are the Consequences of Prescribed Debt?
While you can escape debt once it’s deemed prescribed, it may not be the end of your headaches. Here are some consequences that can come with prescribed debt:
- Potential legal action: Even though the debt is prescribed, your creditor can still attempt to take legal action against you. This could result in frequent visits to the court and possible financial losses.
- Damage to your credit score: One of the biggest disadvantages of prescribed debt is the potential damage to your credit score. This could prevent you from getting loans in the future. I’ll cover more about this shortly.
- Persistent collection efforts: While prescribed debt is legally unenforceable, some creditors could still contact you, urging you to pay the debt. This could give you a series of headaches, stress, and sleepless nights.
With the above said, it’s crucial to understand your rights and responsibilities regarding prescribed debt. When you read the Prescription Act in conjunction with the NCA, you can protect yourself from lenders and debt collectors.
The NCA prohibits lenders and debt collectors from continuing collecting prescribed debt after you’ve provided written notice stating the debt is prescribed.
The NCA promises that if a debt collector continues contacting you forcefully, urging you to repay prescribed debt, they’ll face harsh penalties and may be sanctioned.
Can Prescribed Debt Affect Your Credit Score?
Prescribed debt can negatively impact your credit history and financial health. There are two main ways it can impact your financial life.
- Creditworthiness: Prescribed debt can prevent you from accessing new debt. When you apply for credit, lenders review your credit report before approving it. Lenders will consider having prescribed debt on your credit report as a red flag about your ability to handle your financial obligations. This may influence lenders to deny you credit, even if you earn a good income.
- Credit score: Your credit score is a three-digit numerical representation of your creditworthiness. Credit score providers calculate it by using various factors including credit utilisation, account balances, payment history (including for prescribed debt), and negative information such as bankruptcy.
A lower credit score informs lenders that you’re a risky borrower; the chances of repayment of debt aren’t good. If you’re offered a loan or credit, you’ll likely be charged high interests and other unfavourable terms. Prescribed debt can contribute to a lower credit score.
Your best bet is to remove prescribed debt from your credit report. Here are the steps to take to remove prescribed debt from your credit report:
- Step 1: Check and review your credit report. Get your annual free credit report from each of the major credit bureaus in South Africa: TransUnion, Experian, and Xpert Decision Systems (XDS) . Go through the report thoroughly to identify any inaccurate information, accounts, and prescribed debts.
- Step 2: Gather relevant documents. Collect all the supporting documents that substantiate your dispute. This could be correspondence with lenders or any other relevant documents.
- Step 3: Contact the credit bureaus. Armed with the relevant documents, contact credit bureaus (XDS, TransUnion, and Experian) to lodge your dispute. Typically, a credit bureau will ask you to fill a dispute form to get started with the dispute process. Visit the respective websites of these credit bureaus to launch your dispute.
Can Debt Be Prescribed Under Debt Review?
To answer this question, it’s a good idea to first understand debt review: what it is and how it works.
Debt review, also known as debt counselling, is a process to assist individuals who are over indebted manage their debt better. It offers a structured and regulated approach to managing and eventually reducing one’s debt burden.
Here’s a brief review of how debt review works:
- Assessment: The debt review process begins with a financial assessment by a qualified debt counsellor. You need to approach a debt counsellor affiliated with the National Credit Regulator. During this assessment, the debt counsellor carefully reviews your income, expenses, and debts to determine the extent of the financial distress.
- Formal application: If the debt counsellor determines that you qualify, they’ll request you to complete an application for debt review using Form 16.
- Debt counsellor informs your lenders and credit bureaus about that you’ve applied for debt review: The lenders confirm the debts and balances you have with them using Certificates of Balances (COB). Your debt counsellor will determine whether you’re over-indebted. If you’re over-indebted, your debt counsellor negotiates with your lenders to come up with a workable repayment plan.
- Debt repayment plan: The debt counsellor then creates a structured debt repayment plan tailored to your financial situation. This plan typically extends the repayment period and reduces interest rates, and may also remove late fees and penalties.
- Protection from creditors: Once the application is accepted, a legal protection known as a “debt review flag” is placed on your credit report. This prevents creditors from taking legal action, such as repossession or garnishment of wages.
The court gives order for debt review to proceed. When lenders and your debt counsellor have agreed upon the repayment plan, the debt review goes to court. It’s only the court that grants an order that finalises your debt review application.
- Single monthly payment: Once the court grants a debt review order, you’re required to make a single monthly payment to a payment distribution agency (PDA). The PDA then disburses the funds to your lenders as per the agreed-upon plan.
- Debt clearance certificate: Once you’ve paid all your debts included in the debt review repayment plan, you receive a debt clearance certificate. This clearance signals that you have successfully completed the debt review program. You can then begin to rebuild your credit record.
Debt review often includes financial counselling and education to help you make informed financial decisions and avoid future debt problems.
The duration of debt review can vary, depending on the amount of debt and your ability to make consistent payments. It typically takes several years to complete, during which you must adhere to the repayment plan.
The primary purpose of debt review is to help individuals who are struggling with their current, valid debt obligations. Since prescribed debt is no longer legally enforceable, it doesn’t form part of the debt review program.
Conclusion
It’s time for you to take action. Do you have prescribed debt that’s troubling you? Or, are you unsure if you have prescribed debt? Hop onto one of the credit bureaus’ websites and request a free credit report if you haven’t yet received one.
Review your credit report and get started with the removal of prescribed debt if you have it. Doing so will clean up your credit profile and improve your creditworthiness.
What’s your experience about prescribed debt? Please share your views and experience in the comments section below so that others can learn from you.
