CONSUMER ALERT

THE DEBT TRAP AND ADMINISTRATION

Purpose:

The purpose of this communication is to alert the media and the public about the debt trap and the right of consumers have to information about their options, and the costs involved to be placed under administration and the cost of compounded interest. .

Issued by:

Education and Compliance directorate, Office of Consumer Protection

What is the debt trap?

Borrowers should be aware of the consequences of over-indebtedness and the risks as well as the cost of opting for debt administration.

The implications of over-indebtedness and abuse of debt administration cannot be over-emphasised.

Unfortunately, some unscrupulous individuals regard over-indebtedness as a moneymaking opportunity, and lure unsuspecting over-indebted consumers with promises of quick solutions to “get rid of their debt”.

What to do should you not be able to meet your debt obligations?

Section 74 of the Magistrate’s Court Act allows people with no tangible assets and debts of up to R50 000 to apply to the courts for an administration order. The, order temporarily protects debtors (consumers) from their creditors and enforces a repayment plan that enables borrowers to repay their debts and still have some money for living expenses.

Consumers should be aware that it is a costly alternative because it could cost up to R1 200 to obtain the administration order. Administrators then take12,5 % of the monthly payments for their services while the employers take another 5% “management fee” because they must pay the administrator the designated sum every month.

EXAMPLE:

For example, a debt of R13 650 can be paid in two ways; at the annual interest rate (28%) or under administration by court order.

Annual Interest rate	Under administration
At 28% annual interest, payment is: Amount owed - R13 650 (at 28% p.m.) Period of payment- 12 months Monthly payment - R1 317 Total amount repaid - R15 807	Under administration, payment is: Amount owed - R13 650 Legal fees for Administration order - R14 850 New payment - R450 per month Less 5% to employer -R22. 50 p. m. Less 12.5% to administrator- R53. 43 p. m. Payment to creditors- R375.00 per month Period of payments- 109 months (over nine years) Total amount to be repaid- R49 050

What does being placed under Administration mean?

An administration order is a valuable option to protect and assist consumers to repay their debts orderly and affordably and enable them to re-enter the economy with dignity on discharge.

It places the management of their financial affairs in the hands of debt administrators. The administrator receives your income and, after deducting an amount to cover your living expenses, distributes the rest proportionately among your creditors. The administrator can, in terms of the Magistrate’s Court Act, charge a maximum fee of 12,5 percent of the amount distributed to creditors.

Some administrators do not comply with this provision and charge far more than R1 200 to obtain the administration orders and 22,5 percent or even more for the monthly service fees. Some administrators do not pay over the money to the creditors and this leads to mounting debt that is never settled.

What rights and responsibilities do consumers have?.

o Consumers are encouraged to investigate all alternatives before applying to be placed under administration.

o If you are over-indebted, the best option is to speak directly to your creditor/s and be honest with them, making some repayment arrangements directly. This increases creditors’ chances of getting their money back, and helps debtors avoid legal action and bad credit bureau record.

o If being placed under administration is the best option for you, ensure that you go to a credible person and that you charged the legally prescribed rates.

Who can consumers contact?

Consumers who are over-indebted and those who have been placed under administration order or considering to be placed under administration order, can contact:

o the dti call center on 0861 843 384,

o Micro Finance Regulatory Council (011) 647 4400 or 0860 100 406;

o Debt Counseling Advisors at Magistrate courts

for assistance and advice to reduce their debt to manageable levels to improve their financial situation and empower them with information to reduce their possibility of slipping back into bad debt.

OTHER SERVICES:

The Education and Compliance directorate issues this information as part of an overall education service to consumers. The directorate also offers the following services:

· Advisory opinions and clarifications

· Presentations

· Information materials.

Enquiries may be directed via the consumer help line at 0861 843 384.