Are you repaying a prescribed debt? Ombud cautions consumers about banks breaking the law
Some banks are tricking customers into repaying debts that have prescribed.
The Ombudsman for Banking Services has written off debt and returned more than R1 million to consumers because of this.
Read on to see when a debt prescribes, when the prescription gets interrupted, and what methods banks have been using to trick customers.
In 2021, the Ombud for Banking Services received 118 complaints about banks tricking consumers into repaying debt that should have been written off because it had prescribed. Debts taken out under the National Credit Act (NCA), such as unsecured loans, vehicle loans, overdrafts and credit cards, can prescribe after a certain period of non-payment. This means it has expired, and banks and other credit providers are no longer allowed to collect it.
However, Reana Steyn, the Ombud for Banking Services (OBS), has sounded the alarm about the rise in cases where banks are collecting prescribed debt. She said between January 2021 and July 2022, the OBS received and investigated 193 complaints about this.
After investigations, it found that banks were breaking the prescription laws in 33% of cases brought to the OBS's attention. More than R1 million has since been written off or repaid to customers tricked into paying up.
"In 2022, the OBS has to date received 75 of these matters. In 29% of these cases, banks have again been found to have transgressed the Prescription Act as well as the NCA," said Steyn.
When does a debt prescribe?
The Prescription Act states that contractual and civil debts lapse after three years from the date when they became payable if the consumer didn't pay. The debtor must not have paid or acknowledged that they owe the creditor for three years. Steyn said that the law is there to safeguard consumers against unfair and exploitative practices by creditors.
But there are instances when this period may be delayed or interrupted. This includes a bank's claim for the repayment based on a court judgment. Debts secured by mortgaged bonds are also an exception to the three-year rule. They only prescribe after 30 years of non-payment.
The other critical determinant of whether a debt has prescribed is if it falls within the NCA or not. Debts excluded from the NCA include those owed by the state or organs of state, credit agreements between a juristic person – a business whose asset value or annual turnover exceeds R1 million – and someone with a controlling interest in that business.
On debt agreements governed by the NCA, prescription is interrupted if, at any point during the three years after the payment was due, the customer admitted, verbally or in writing, to owing the debt. If the debtor makes any payment towards the said debt within three years or if the creditor issued and served a summons, prescription also gets interrupted.
Steyn said if none of these things happened and a consumer receives a letter of demand from the bank or its lawyers more than three years after the debt repayment was due, they should raise prescription.
"If they continue to demand payment or take any other steps to collect the debt, you should log a complaint with the OBS," said Steyn.
Here are some examples
In one case, a consumer took out a personal loan of R74 687 in December 2016. He made sporadic payments to the bank until 4 January 2019. He never made any other payment after that.
He also did not acknowledge the debt or receive a summons from the bank until 4 February 2022. At that point, the outstanding balance was more than R112 495. The bank alleged that its attorneys called the customer at some point, and he acknowledged the debt in that call.
But upon investigation, the OBS listened to the call recording and found that the customer did not acknowledge the debt. It ruled that the debt had legally prescribed. The bank had to write off the entire debt and issue a paid-up letter to the customer and credit bureaus.
In another case, a customer took out a credit card with a limit of R25 000 in May 2016. He used it until he was in the red, making payments up to R26 305. He only made sporadic payments to the bank. Because of these defaults, the bank handed over the account to its attorneys for collection. In November 2016, he signed a Section 58 Consent to Judgment. He made the last payment to that account in August 2017.
The bank argued that since the customer signed the Consent to Judgment and made a payment in August 2017, he acknowledged his debt. In March 2021, it obtained a court judgment against the customer, and he resumed making payments in August 2021.
But the OBS found that since the customer did not make payments or verbally acknowledge the debt in writing after August 2017, that debt had prescribed in August 2020. The bank was forced to apply to rescind the March 2021 court judgment and refund all the payments the customer made after August 2020.