Banks are going after prescribed debt in South Africa – what you need to know
The Ombudsman for Banking Services (OBS) says it is receiving complaints from bank customers relating to creditors coming after prescribed debts – and it is now urging consumers to get informed about how this debt is handled in South Africa.
Prescribed debts are generally contractual and civil debts that should be extinguished or written off after a period – typically three years – from the date when the payment was due. However, this happens under stringent circumstances.
When it comes to debt that has already prescribed, it becomes unlawful for creditors like banks to try and recover those funds. The National Credit Act (NCA) protects consumers against this – but only if they know their rights, says banking ombud, Reana Steyn.
Steyn said that many indebted South Africans do not know how the laws work and are left paying for debts that have prescribed and are therefore legally no longer collectable by creditors.
Meanwhile, cases that have come through the OBS show that banks have been guilty of engaging in the illegal practice of collecting on prescribed debt.
Between January 2021 and July 2022, the OBS received and investigated 193 complaints relating to allegations of collections on prescribed debts by banks.
While the majority of these cases still found in favour of the banks, 33% of the cases in 2021 and 29% of the cases in 2022 so far have found that the banks in question have been unlawfully collecting or attempting to collect on prescribed debts.
An amount in excess of R1 million has been written off or repaid to consumers as a result, the OBS said.
What the law says
Under South African law, namely, the Prescription Act read with the National Credit Act, a debtor’s obligation to pay off a specific debt can be extinguished due to the passing of a prescribed period.
The Prescription Act provides the period after which an obligation ends – typically three years – and the instances in which this period could be delayed or interrupted.
Exceptions where the prescription period for certain debts is longer include but are not limited to a bank’s claim for the repayment of a monetary debt based on a court order or claims for debts secured by mortgaged bonds. Debt in these scenarios prescribe after 30 years.
Steyn added that the legality of the collection of a prescribed debt depends on whether it falls under the National Credit Act or not.
“In other words, whether the debt relates to a credit agreement and falls within the definition of a ‘credit agreement’ as described in the Act.”
Some examples of debt under the NCA include:
- Overdraft facilities;
- Mortgage loans;
- Personal loans;
- Credit card debt; and
- Vehicle finance agreements.
It is, however, still legal for creditors to demand payment or call consumers to get them to acknowledge a prescribed debt and even sue on a prescribed debt for agreements falling outside the National Credit Act.
Steyn stressed that once a consumer has acknowledged owing the debt – even if they have not made payment – they will not be successful in raising prescription as a defence in court.
Consumers are not required to be aware of this law as, under the protection afforded by law, the banks and other creditors are prohibited from collecting or selling debt that has prescribed.
Consumers also do not have to raise the defence of prescription to be absolved from paying these debts and to have their credit bureaus profiles updated to reflect the correct state of affairs, added Steyn.
When is prescription interrupted?
According to the Prescription Act, the running of prescription is interrupted if, during the three years after the payment was due, the following happens:
- The debtor admits, verbally or in writing, to owing the debt;
- The debtor makes a payment towards the debt; or
- The creditor issues and serves a summons on the debtor.
“If you are a bank customer and none of the above happened, and you receive a letter of demand from the bank or its lawyers for payment of a debt you believe has prescribed in law, you should raise prescription. If they continue to demand payment, you should log a complaint with the OBS,” said Steyn.
Steyn said that the prescription laws are in place to protect consumers from creditors chasing after legally prescribed debt and shouldn’t be seen as encouraging consumers to renege on their debts.
The OBS warned that in the cases where complaints were dismissed in favour of the banks, the debt – which had not prescribed – had accrued significant amounts of interest and were far higher than the amounts initially owed. Meanwhile, the complainants also had to pay legal fees and other costs associated with the unpaid bills.
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