You would think that banks would know which debts they are legally entitled to claim, and which they are not. But apparently many of them are still collecting debts to which they are not legally entitled – known as prescription debts.
Most consumer debt resides in contractual credit arrangements such as gym memberships, store accounts, overdrafts, personal loans, payday loans, and cell phone contracts.
If, as Debt Rescue explains here, the credit grantor has made no effort to secure payment, communicate with the customer, or initiate legal action, the money owed becomes a statute-barred debt; it is considered expired and can be legally cancelled.
It is important to note that a legal action may be served even if the person has not physically received notice of such action; this can happen if, for example, a person changes their address and neglects to update their details with the credit grantor.
The statute of limitations is however a wonderful law that every South African should spend some time to understand.
Here’s an introduction we ran in Moneyweb a few years ago: How to Deal With Collection Agents
Independent lawyer Leonard Benjamin provides a brief summary.
The prescribed (expired) debt is not payable
First, says Benjamin, understand the statute of limitations and the National Credit Act. In its simplest form, if a borrower defaults on a debt and three years have passed since default, that debt is barred (expired) and therefore uncollectible. This applies to overdrafts, credit cards and other debts (although in the case of mortgage debts or court debts the limitation period is 30 years). However, the bank can keep the debit “alive” by issuing a summons within three years after the default.
Beware of “prescription interruptions”
Debt collectors will phone you and try to get you to admit that you owe money (also called a “stop order”).
They will put you on the phone and make you verbally admit that you have taken out a loan. If you admit it, you’re done.
You have “broken the statute of limitations” and kept the debt alive. Even if you feel morally obligated to pay an old debt, never agree to it over the phone. The lesson in all of this is to never communicate with debt collectors over the phone. Ask them to put everything in writing.
The banking mediator intervenes
This is all relevant due to a new statement from the Banking Ombudsman (OBS) that some banks are still trying to collect statute-barred debts to which they are not entitled.
“Unfortunately, in many cases, the protection offered by the law only benefits consumers who are aware of the legal principle as well as the ombuds office. The majority of the public have to pay debts that have been barred and are therefore no longer legally recoverable by creditors,” says Reana Steyn, the banking services ombud.
The statute of limitations is clear, Steyn adds. “Generally, contractual and civil debts are extinguished if they are not paid or recognized as due to the creditor by the debtor for a period of three years from the date on which payment was due.”
The important part to note in the sentence above is that the debt is extinguished if it is not paid or recognized.
Astute attorneys and debt collectors know that most people don’t know or understand the statute of limitations, so they’ll get you to acknowledge the debt over the phone. Benjamin advises never to talk to a debt collector on the phone. Communicate only in writing, but don’t ignore written communications either.
Between January 2021 and July 2022, the OBS received and investigated a total of 193 complaints regarding alleged collection of debts prescribed by banks, resulting in the cancellation or refund of over R1 million to the complainants.
The OBS says it received 118 complaints in 2021, of which around a third were about banks flouting the law by collecting or attempting to collect statute-barred debts.
“In 2022, the OBS has so far received 75 of these cases. In 29% of these cases, the banks were again found to have breached the statute of limitations as well as the NCA [National Credit Act]says Steyn.
It adds that just last week an amount of R216,197 (the outstanding balance) was canceled in one case and the claimant was also refunded the R3,200 he had paid for the statute-barred debt.
Is it legal or illegal for creditors to collect a prescribed debt?
It depends on whether or not the debt falls under the NCA. Credit arrangements covered by the NCA include overdrafts, mortgages, personal loans, credit card debt and vehicle finance arrangements.
If you are in default and do not acknowledge the debt for three years, that debt is statute barred. Your correct response to anyone calling you for a statute-barred debt is, “What are you doing calling me for a debt that you know is statute-barred? What you are doing is illegal and I will report you and your business to the Banking Ombudsman. Hang up the phone without further discussion. And then file a report with the Banking Ombudsman.
The statute of limitations was written into the NCA, making it illegal for banks and other creditors to collect or sell a statute-barred debt. This was a big step forward for consumers, since it meant that debtors no longer had to be aware of the law of limitation, nor invoke it as a defense to be excused from paying old debts.
“It is important for consumers to be aware that once they have acknowledged owing the debt, even if they have not made payment, they will not be able to successfully invoke the statute of limitations defense in court. if they are sued by creditors over statute-barred debts,” Steyn says.
When is the prescription stopped?
According to the statute of limitations, the course of the limitation period is interrupted if, during the three years following the payment becoming due, there occurs:
- The debtor has admitted, verbally or in writing, to be liable for the debt;
- The debtor has made a payment on the debt; Where
- The creditor issued and served a summons on the debtor.
“If you are a customer of a bank and none of the above situations have occurred, and you receive a demand letter from the bank or its lawyers for the payment of a debt that , in your view, is statute-barred, you should increase the statute of limitations. If they continue to demand payment or take any other action to collect the debt, you should file a complaint with the OBS,” advises Steyn.
She adds that while banks claim to have policies and systems in place to ensure they are not breaking the law and collecting statute-barred debts, the OBS still routinely receives such complaints from bank customers.
Exceptions to the rule
Benjamin says there are exceptions to the NCA to keep in mind.
“Accessory credit agreements are a category of consumer contracts which do not begin as credit agreements, and therefore [aren’t] subject to the NCA, but convert to credit agreements in certain circumstances and become subject to certain sections of the NCA. Section 126B applies to collateral credit agreements.
An ancillary credit agreement is defined as:
“an agreement, in whatever form, under which an account has been offered for goods or services which have been supplied to the consumer, or goods or services which are to be supplied to a consumer over a period of time and one or the other or both of the following conditions apply:
a) fees, charges or interest have become payable when payment of an amount charged to this account has not been made by a specified period or date at the latest; Where
(b) two prices have been quoted for settlement of the account, the lower price being applicable if the account is paid on or before a specified date, and the higher price being applicable because the account has not not been paid on that date.
For example, you go to the dentist and you receive a bill that must be paid on the spot. This is not a credit agreement.
However, it will become an accessory credit agreement if an arrangement to spread the payment is made and interest is applied for the late payment. In this case, the rules of limitation relating to the debt will be as described in the NCA.
That shouldn’t be an excuse to avoid valid debts, but it’s clear that banks are illegally collecting far more statute-barred debts than the OBS figures suggest. And this must be stopped.