Should your home loan be kept out of debt counselling?
Placing a debtor's primary residence under debt review is a problem, because it assumes that servicing the mortgage bond on your home is "not essential", Dr Penelope Hawkins told a recent debt summit co-hosted by the Credit Ombud and the National Debt Mediation Association.
Hawkins is managing director of Feasibility, an economic policy research company that has conducted extensive research on behalf of the National Credit Regulator into credit extension and into the outcomes of the National Credit Act.
She recommends that the inclusion of a debtor's home loan in debt counselling should be reconsidered.
When you are over-indebted and undergoing debt counselling, your debt counsellor works out how much money you can afford to spend on servicing your debt - after allowing for all of your essential living expenses. These expenses include accommodation, food, water and electricity, transport and school fees.
"If you assume that servicing a The Debt Counsellors' Association of South Africa (Dcasa) does not support the proposal to exclude home loans from debt review, Paul Slot, president of Dcasa, says.
"The inclusion of the home loan under debt review was introduced by the National Credit Act (NCA) and has enabled many consumers to keep their homes," Slot says.
These consumers had to sacrifice their standard of living to keep their homes, and debt review, in their view, was part of the solution, he says.
"Currently, the NCA requires that all debt (credit agreements) be included in debt review, and this is working well."
Slot says that in terms of affordability rules, as set out in the Industry Task Team Agreement, accommodation is an essential bond is not essential and that the debtor can substitute their home with another living arrangement, then you've made a lot of assumptions," Hawkins says.
"If you say a consumer is paying too much on a bond or for rental, it means that consumer is obliged to move elsewhere.
"But as soon as you go under debt counselling, your profile is flagged at the credit bureaus, and when you start looking for accommodation to rent, a prospective landlord will run a credit check on you and see that you're in debt review, which is likely to disqualify you as a tenant."
If you go under debt counselling in the United Kingdom, for example, your primary residence is considered an essential expense - which is common sense, Hawkins says.
"Think about what secured lending does: it's a long repayment term to enable you to acquire an asset. If the repayment of that asset is placed under debt review, it disrupts your potential for acquisition of the asset," she says.
It is time that some of the assumptions underlying debt counselling in South Africa were reconsidered, she says.
"We've developed a rule system where we acknowledge that the debtor needs to eat and pay water and lights and so on, but do not accept that relocating a family has a number of consequences.
"So you get a consumer in debt counselling who is serving the debt on his television but has nowhere to live. I'm not sure that this is to the benefit of society - certainly not the consumer.
"The practical implications of giving up your home may affect where your children go to school, transport arrangements, and the like. While the mortgage on a holiday home or rental property may well be included in debt restructuring, not all mortgages are equal," she says.
Hawkins acknowledges that debt counselling is not for everyone. "There will be those who play the system, who borrow recklessly, but I don't know that you want to create rules that deal with extreme cases and apply it to all others.
"We know that there are people under debt counselling who want to pay three cents in the rand to service their debt and will be doing so in perpetuity. These are people who can't be helped via debt counselling. Their matters will never 'solve', because their situations are so extreme," Hawkins says.
The Independent on Saturday