Can your debt be cancelled?

If you constantly struggle to pay your debt, you may have considered asking your creditors to write off some - or all - of it. But this request is highly unlikely to be met with any success.

There are conditions that must be met and procedures that must be followed before debt can be cancelled. We approached the experts to find out what these are.

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How can debt be written off?

A debt write-off occurs when a creditor recognises that there is very little chance of collecting debt, resulting in a loss for them, says Faisal Mkhize, managing executive of vehicle and asset finance at Absa.

This can happen after multiple missed payments have occurred on an outstanding loan, adds Afua Darko, partner account manager at DebtBusters.

According to Darko, when banks decide to write off debt, they transfer it to their bad-debt book, or hand it over to a collection agency or legal firm. This usually happens after 12 missed payments. However, for smaller banks and lending houses, this could happen after six to nine missed payments.

READ MORE: Avoid debt collectors, choose debt counselling.

Some creditors will try to collect the debt until it reaches its expiry date. Creditors are not allowed to collect prescribed debt. According to the law, debt must be cancelled if a certain period has passed without collecting the debt. If it’s unsecured debt, the period must be three years. Some debt such as home loans only expire after 30 years.

The following conditions must be met before debt is cancelled:

• the consumer mustn’t have owned up to the debt either in writing or verbally,
• the consumer mustn’t have made any payment towards the debt,
• and the lender mustn’t have taken action against the consumer.

What about reckless lending?

Another way that your debt can be written off is when investigations show that lenders were reckless when they extended credit to you. According to the National Credit Act, the creditor is guilty of reckless lending if no affordability assessment was done, and if the consumer didn’t understand the obligations, the costs and risks of the credit agreement. The act requires banks to apply the minimum living expenses table, as well as all the debt commitments across all credit providers listed at credit bureaus.

According to Mkhize, the National Credit Regulator also introduced stricter rules such as using more recent scoring (the information used to assess unsecured credit must be less than seven days old), and shorter timeframes for credit providers to share changes in customers’ credit profiles with the credit bureaus; ensuring credit providers use the most up to date information when granting a loan.

If the court finds that you’ve become overindebted because the lender didn’t follow the due procedure when you applied for credit, your credit agreement may be suspended, or the debt may be written off.

“It’s important to note that lending is based on the overall risk profile of the customer at the time of inception of the loan,” says Mkhize.

“Whilst we are not in a position to provide significant detail on credit decisions, the affordability assessment remains a key component of our lending decisions. We consider the customer’s income, current debt commitments and monthly household expenses to determine the available affordability to take on additional debt.

“The main focus for consumers should be to ensure that they can provide credit providers with sufficient evidence that they can handle credit responsibly (by having a good credit history) and ensure that they can afford the monthly instalment required, while considering the current economic environment.”

It’s also important to strike a fine balance between lending and collection practices. It’s in everyone’s interest to avoid debt write off.

How does debt write off affect your credit rating?

Mkhize says debt write off doesn’t only affect the creditors, it also has a bearing on your credit rating.

“Undoubtedly, this has major consequences for creditors, the creditworthiness of an individual and will have long-term implications on the person’s ability to access credit in the future,” says Mkhize.

According to Transunion, if your account is written off, creditors will report your account as in default and it will stay in your credit report for a year or until you pay your account. 

If you don’t pay your debt, it becomes harder to obtain credit, and if you do manage to get credit, the interest you will be charged will be very high because you pose a greater risk.

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