Do I have to pay my debt if my credit provider has written it off?
Updated: Jan 6, 2021
In order to answer this question, we need to understand why credit providers write debt off.
When a credit provider gives a loan, they will always take a certain amount of money and set it aside in case the loan is not repaid. This is called an impairment and happens the moment the loan is given. In other words, credit providers take money out of their profits to provide for some of the debts owed to them not being repaid. As the loan is repaid so the amount of the impairment will go down and the credit provider will show a profit, but if you fall into arrears with the loan then the impairment as a percentage of the outstanding amount will go up in the credit provider’s books. The further in arrears the account is the more the credit provider will set aside against the loan, until they have set aside the full amount that is outstanding.
As the loan is falling further behind the credit provider will be trying to collect the arrears or even the full amount. This action takes the form of phone calls, threatening letters, personal visits, and sometimes even legal action. When the credit provider thinks there is no longer a reasonable chance of getting their money back, usually when the impairment is the same as the outstanding amount, then the credit provider will write off the debt. This means that the debt is removed from their books of account and is no longer reflected as an asset in their books. It does not mean that the borrower no longer owes the money because the legal status of the debt is not altered.
In other words, writing off is an internal accountancy action and nothing more. At this point the debt is often sold to a specialist debt recovery company and they will continue to collect on it.
Ok, so when do I no longer owe the money?
The Prescription Act (Act 68 of 1969) says that a debt is extinguished after the prescribed period in South Africa. This means that if the person to whom money is owed has failed to take legal action (that means a summons to Court) to recover the debt from you, you no longer owe it after the prescription period.
The period for prescription varies, depending on the type of debt it is, but broadly:
· On a home loans it is 30 years
· On Judgements and money owed to the state for taxes, including municipal rates, but not money owed to the municipality for services such as electricity, water and sewerage, it is also 30 years
· For all other debt it is three years, including e-toll charges!
Prescription starts counting as soon as the payment is overdue.
What’s the catch?
It is especially important to know that if you admit to owing the debt, then the prescription period starts all over from the moment you admit it. Making a payment is the same as admitting that you owe it. Many debt collectors will entice you to make a payment as little as five Rand with an incentive of a lucky draw, just to convince you to restart the prescription!
But are debt collectors allowed to collect on prescribed debt?
Debt collectors can attempt to collect any prescribed debt, except for credit agreements. A credit agreement is a debt covered by the National Credit Act and regulated by the National Credit Regulator (NCR). These are typically all debts where interest is charged or where there is a penalty for late payment. If the debt is a credit agreement, then it is illegal for anyone to try and collect on that debt after prescription. If, however, the debt is not a credit agreement, such as a doctors account, then it is not illegal for them to ask you to pay.
In order to protect your rights under prescription, YOU MUST NEVER ADMIT TO OWING THE DEBT. Ask for a statement and then leave it at that. As soon as you admit to owing the
debt prescription may restart.