Few South Africans have heard of the Prescription Act, which sets out conditions under which a debt can no longer be collected. From Moneyweb.
The Prescription Act is a wonderful if under-used piece of legislation that sets out the conditions under which debts can no longer be collected.
Simply put, prescribed debt is an old obligation that the consumer has not acknowledged or paid within three years.
It’s probably worth reading that sentence again.
If you default on a debt and three years pass, that debt is prescribed provided you do not acknowledge the debt within that period.
And there’s the trick. Debt collectors will try to get you to acknowledge the debt years after it has prescribed, knowing that you probably don’t know about the Prescription Act.
If you have defaulted and make a payment within the three-year period, you have ‘interrupted prescription’ and a new three-year period starts running.
How not to handle a debt collector
Debt collector: Ms Jonas, I am phoning you about your bank overdraft with Bank X. The amount outstanding is R19 211. I would like to make arrangements for you to repay the loan. When could we expect a payment from you to avoid blacklisting or legal action?
Ms Jonas: I’m not sure what you are talking about. That was a long time ago.
Debt collector: You took out an overdraft for R12 000, do you remember that?
Ms Jonas: Yes, but that was so long ago.
That’s a fatal mistake. Ms Jonas has just admitted the debt.
She would also acknowledge the debt if she made a payment. She has ‘interrupted prescription’.
The debt collector does not mention that the debt is more than three years old and has never been acknowledged in that period. Nor does he mention that Bank X long ago sold the debt to a collection agency for cents in the rand. But he caught Ms Jonas out by trickery, as debt collection agents are trained to do (they do know about prescription but avoid discussing it).
The correct way to handle a debt collector
Debt collector: Ms Jonas, I am phoning you about your bank overdraft with Bank X. The amount outstanding is R19 211. I would like to make arrangements for you to repay the loan. When could we expect a payment from you to avoid blacklisting or legal action?
Ms Jonas (correct answer): The debt you are trying to claim is prescribed and what you are doing is illegal. Now leave me alone or I will report you to the authorities.
The bottom line is never to take phone calls from debt collectors where you can fall into their many traps.
If necessary, ask them to put everything in writing and send it to you so you can look at later. (Debt collectors know to phone at certain times of the day – such as early morning – because the response time is better than later in the day).
Read: How to deal with debt collectors
Assistance
One of the bodies you can approach for assistance over disputed debts, or prescription claims, is the newly established National Financial Ombud Scheme (NFO).
Disputes are however best avoided.
Howard Gabriels, lead ombud for the NFO’s credit division, has some advice: “Where consumers do have a say in how they spend their money, for example on the purchase of new vehicles and property or on credit cards, we urge them to think long and hard, taking into consideration the long term consequences should they not be able to service their debt repayments and to look at ways to reassess their budgets, with better financial planning practices, rather than facing a possible repossession scenario down the line.”
The NFO notes that prescription is largely unknown to consumers in SA, and many are caught off guard as a result – particularly when it comes to repossession of vehicles, furniture and other goods purchased on credit.
Case involving a vehicle repossession
The ombud details a recent case where a customer signed an instalment sale agreement in January 2019 for the financing of a vehicle.
The first payment was due on 1 March 2019, but the customer defaulted from April 2019 and started to accumulate arrears. The customer was unhappy with the condition of the vehicle and took his complaint to the Motor Industry Ombudsman SA. The vehicle was duly repaired by the dealership.
The customer continued to default and on 7 January 2020 decided to voluntarily terminate the credit agreement and return the vehicle to the bank.
The bank followed the processes outlined in the National Credit Act, sold the vehicle at auction and credited the proceeds to the customer’s account. However, that still left a shortfall of R94 027 excluding costs which the bank attempted to recover from the customer.
Read: Banking ombud sounds alarm on higher car repossession complaints
The complaint was taken to the NFO which could find no evidence that prescription had been interrupted. In other words, the customer had neither acknowledged the debt nor made payment over a three-year period.
“It was therefore recommended that the bank write off the shortfall that remained after the sale of the vehicle due to their claim having prescribed after three years. The bank accepted the recommendation, and the debt was written off,” concluded the NFO.
The NFO recommends voluntarily surrendering the vehicle to the bank when a customer falls into financial difficulties, as this avoids the bank proceeding with legal action and taking judgment for the recovery of the vehicle.
It also recommends that financially distressed customers communicate with the bank and make payment arrangements for outstanding debts – even though the bank is under no obligation to accept such arrangements.
Knowing your prescription rights
Many people have been brainwashed by grubby lawyers in the service of lenders that all debts must be honoured, no matter how old.
Until 2004 you could even go to prison for debt, a barbaric relic of Roman law that had infiltrated our legal system. You may feel a moral obligation to pay all debts no matter how long ago, but that is not the legal position.
Consumer advocate Leonard Benjamin says the National Credit Act (NCA) prohibits the sale of prescribed debts arising from a credit agreement and also prohibits the continued collection and reactivation of already prescribed debt.
“Further, the NCA prevents the collection of a prescribed debt where the consumer would reasonably have raised prescription if they had been aware of such a defence. In effect, this means that unless the consumer undertook to repay the debt even though they knew that the debt had already prescribed, the credit provider is not entitled to collect the debt,” adds Benjamin.
“It is important to know when prescription starts running,” he adds.
“When the debt is a loan that is repayable in monthly instalments, the entire debt becomes due and payable for purposes of prescription when the debt is accelerated, in other words, the full amount of the loan becomes due and payable.”
Listen/read: Vehicle finance defaults now at R4bn
The conditions under which a loan is ‘accelerated’ must be spelt out in the loan agreement. Some agreements require the creditor to give notice before the debt is accelerated. In other cases, the debt is automatically accelerated and falls due and payable if a single repayment is missed.
As soon as a credit provider serves summons, prescription is interrupted, and you cannot use this defence.
Should the court issue a judgment against you, the prescription period is 30 years from date of judgment. However, if the summons falls away and the legal action is withdrawn, it is as if the summons had never been served and the prescription was never interrupted.
“The case study cited by the NFO is interesting, albeit confusing, because it involves two different sets of rights; the right of a credit provider to collect the debt, and its rights of ownership,” says Benjamin.
“While the former prescribes after three years, ownership is only extinguished after 30 years. This results in the apparent anomaly that the credit provider can recover possession of the vehicle, if it has not already been surrendered voluntarily, even though the consumer does not owe it anything because the debt had prescribed.”
You can contact the NFO by email at info@nfosa.co.za or phone at 0860 800 900.