Your rights when defaulting on a credit agreement

The rising cost of living and recent interest rate hikes have made it difficult for South African consumers to keep up with loan repayments. According to the Eighty20/XDS Credit Stress Report, there has been a 20% increase in the rate of new defaults over the past year.

Although it’s best to avoid defaulting if at all possible, it’s important to note that you do have rights in the event that this occurs. We explain what you can do if you are forced to default, and the steps you can take to secure your rights.

Tip: Debt consolidation may help you to avoid defaulting on your credit agreements.  Find out more now.

What loan protection do consumers have?

You have fundamental rights as a consumer, which are protected in terms of the Bill of Rights, says Dr Stephan van der Merwe, senior attorney at the Stellenbosch University Law Clinic.

“These rights can be applied to consumer law, and are recognised by the national credit act and the consumer protection act,” he explains.

Among these is your right to be treated fairly and with dignity by a credit provider. Your providers are not allowed to impose unfair lending conditions on you, and they are obliged to follow a strict legal process to make sure your rights are safeguarded.

What is a credit default?  

Credit agreements are legal contracts and thus are legally binding.

By definition, a default occurs when you miss payments over a period of three to six months; though this depends on the terms of the agreement, says Kriben Reddy, head of consumer at TransUnion Africa. In this event, your credit provider is entitled to take action against you.

“A default will remain on your credit report for a maximum of one year, but paid-up defaults will be removed within seven days, once the credit provider confirms you’ve paid up to date.

“Once you settle the total outstanding amount, the report will show as paid. After two years, if there is no further activity on that account, this will no longer reflect on your report,” Reddy explains.

What steps will a credit provider take?

When you default on a credit agreement, you will receive a letter of demand from your credit provider, asking you to settle the amount owing, or consult a debt counsellor to help you bring your payments up to date.

This letter of demand will indicate the credit provider’s intention to sue you unless you comply.

You can agree to restructure your debt, which means changing the amount and duration of repayments; or you can enter debt counselling, if you have no chance of repaying the loan or you are over-indebted.

It’s vital that you make sure the amount shown as owing in the letter of demand is correct. If you spot an error, you have the right to dispute it with your credit provider. This must be done in writing.

What are your rights?

If you’re unable to settle your debt, a summons may be issued by the clerk or registrar of the court. A summons must be served by the sheriff of the court and signed by the credit provider or their attorney.

Once you receive a summons, you can make a payment arrangement, consult a lawyer, or indicate your intention to defend yourself in court. You have ten days to indicate that you plan to defend, in the latter case.

You should never ignore a summons, as a default judgment will be issued against you. This will affect your credit record, so it’s best to act quickly to secure your rights.

“Once you have a judgment listed in your credit report, any access to new credit could be denied,” notes Reddy. “A judgment remains on your credit report for five years, or until it’s paid in full or rescinded by a court.”

A judgment can’t be entered against you if you’re working with a debt counsellor, the consumer court, or the credit ombud.

Similarly, you can’t receive a judgment until ten days have passed since you received a letter of demand, and 20 business days have passed since you defaulted. If you receive a judgment together with a letter of demand, your credit provider is not following the correct legal process. This means you’re not being given a chance to remedy the situation.

Six steps you can take when facing money problems 

Reddy says the following six steps can ease immediate financial pressure and help you to avoid worst-case scenarios.

1. Confront the issue head-on. Rather than burying your head in the sand, confront your financial problem and cut every non-necessity from your budget. Do this until your income and expenses balance.
2. Make at least the minimum repayments. Make at least the minimum payments on your bills, as your payment history is the biggest factor in calculating your credit score. This is vital if you want to be able to access credit in the future, when you may really need it. 
3. Communicate with your creditors. Talk to lenders early and often, and arrange a payment plan. Understand what’s required of you and what your lenders expect in return.
4. Ask for a payment holiday. You will still owe the money and interest, but this will give you a breather without any negative consequences for your credit record.
5. Know where you stand. Make sure you know the full extent of your financial commitments, and learn what you can do to improve your credit score.
6. Dispute incorrect information. Dispute any inaccurate information and get it removed from your credit report.

Tip: Check your credit score here to get an accurate snapshot of your financial position.