Cosatu wants consumer debt to be written off

In a submission made to Parliament’s portfolio committee on Trade and Industry on Tuesday, the Congress of South African Trade Union (Cosatu) appealed to the government to cancel debt of consumers who have been victims of reckless and exploitative lending practices.

Matthew Parks, Cosatu’s parliamentary coordinator, said: “While everyone would like debt relief, Cosatu appreciates that this is not possible or practical. Any debt relief needs to target the most vulnerable, impoverished and exploited. There are several legally defined categories of such persons that Cosatu believes desperately need to be targeted and prioritised for any possible debt relief.”

Proposed eligible categories for debt relief

The trade union federation proposed that the following groups of people should be prioritised with debt relief:

• Retrenched workers
• Social grant recipients
• Persons classified as indigent by municipalities and below the income tax
• Highly indebted working and middle class students with student loans
• Home, car, small business and farm loan holders who have paid off a large portion of their loans and fallen in arrears due to retrenchments, financial emergencies, etc.

Cosatu explained families lose their homes and cars when they fall into a financial crisis. Despite having paid off the bulk of their loans and amounts equal to the value of their assets; they are repossessed by banks when they fall into arrears and auctioned off for amounts far below their value.

“Often reports emerge of collusion between bank officials, auctioneers and the persons buying the property who later sell it at a higher price for a profit. In the meantime the family is left destitute, homeless or without their car or small business and black listed.”

Cosatu also said that people who fall victim to illegal and reckless lending should be considered for debt relief as they don’t always understand what they’re consenting to.

“Debt cancellation should be pursued for consumers who have been the victims of grossly negligent reckless lending and in particular who have been the victims of grossly exploitative lending that was in clear violation of the law, charged interest rate payments far in excess of what is legally allowed, charged administrative charges that were nothing less than fraud and theft etc. In cases of criminal lending, reimbursements of excessive charges and fraudulent deductions should be provided and credit records cleared.”

In addition, Cosatu recommended that debt relief should be provided for people who are not able to manage. This should include possible debt write offs, extensions to loan repayments and reduced interest and administrative charges.

Potential consequences of debt relief

Damon Sivitilli, head of marketing at Debtbusters, stated that writing off debt seems like an easy solution, but the consequences thereof need to be taken into consideration.

He explained that similar debt relief processes, such as writing off suggested by Cosatu, have raised concerns in other countries and have had some unintentional consequences such as:

• Difficulty in enforcing the rulings.

• It’s moral hazard for consumers. If relieve is given to some and not others, those others may end up protesting or claiming unfair treatment. It could also encourage consumers to borrow large sums of money assuming that they won’t ever have to pay it back.

• Significantly reducing the amount of credit made available by credit providers, thus further lowering economic growth.

• It will increase the average cost of credit to better credit risk clients.

Considering debt counselling

Sivitilli advised that instead of writing off debt entirely, those who are unable to repay their debt should take debt management solutions into consideration. “Debt counselling is one of the options available to over-indebted consumers. [The service] has improved dramatically over the past eight years, largely due to improved debt counsellors, large investments in IT and infrastructure, payment distribution agents and closer relationships with credit providers.”

He explained that debt counselling allows over-indebted consumers to pay an affordable, restructured monthly instalment towards their debt. Debt counsellors enable this by formally negotiating with consumers’ credit providers and reducing instalment and interest rates by stretching the terms of these loans.

“Consumers [will] also become rehabilitated and educated through the debt counselling process due to the need to follow their new budgets strictly as well as their inaccessibility to take on further credit”, concluded Sivitilli.

Handy Tip: Are you in need of debt counselling? If so, click here and fill out the form and a consultant will be in touch with you.