Reckless Credit: When a Court Can Cancel What You Owe

Most people assume that if they signed for it, they owe it.

South African law does not entirely agree. The National Credit Act contains a remedy that almost nobody is told about at the counter: if the credit provider did not properly assess you before lending, a court or the National Consumer Tribunal may declare the agreement reckless — and then set aside your obligations under it, in whole or in part.

That is not a discount, a payment holiday or a negotiation. It is the agreement itself being unwound, by order.

The remedy is real, it is used, and it is raised most often through debt counselling or when a provider sues to enforce. What follows is what the Act actually says, section by section, so you can tell whether the argument is available to you.

What makes an agreement reckless

There are two routes, and the first is far wider than people expect.

Route one: the provider did not assess you at all.

An agreement is reckless if the provider failed to conduct the assessment the Act requires — and here is the phrase that matters — "irrespective of what the outcome of such an assessment might have concluded at the time."

Read that again. It does not matter whether you could comfortably afford the loan. It does not matter that a proper assessment would have approved you anyway. If the assessment was not done, the agreement is reckless on that ground alone. The Act treats the omission itself as the wrong.

Route two: the provider assessed you and lent anyway.

An agreement is also reckless where the assessment was done, but the preponderance of information available to the provider indicated either that:

you did not generally understand or appreciate the risks, costs or obligations under the proposed agreement; or
entering into the agreement would make you over-indebted.

The second of those has its own definition, which we come to below.

The test looks backwards, not at you today

This is the second thing worth understanding, because it cuts both ways and people get it wrong in both directions.

The criteria are applied as they existed at the time the agreement was made, and expressly without regard for your ability, at the time the determination is being made, to meet the obligations or to understand the risks.

So: if your circumstances improved after signing — a better job, a raise, a windfall — that does not cure a reckless agreement. The question is what the provider knew and did when it lent.

And equally, if your circumstances collapsed after signing — retrenchment, illness, a business failing — that does not make an agreement reckless that was properly assessed at the time. Genuine hardship arising later is a different problem with different remedies, chiefly debt review.

Reckless credit is a claim about the lender's conduct at a moment in the past. It is not a claim about how hard things are now.

What the provider was actually required to do

The assessment obligation is specific. Before entering into a credit agreement, a provider must take reasonable steps to assess:

your general understanding and appreciation of the risks and costs of the proposed credit, and of your rights and obligations as a consumer under a credit agreement;
your debt repayment history as a consumer under credit agreements;
your existing financial means, prospects and obligations; and
where you had a commercial purpose, whether there is a reasonable basis to conclude that the purpose may prove to be successful.

The Act then says plainly that a credit provider must not enter into a reckless credit agreement with a prospective consumer.

Two points about the third limb. "Financial means, prospects and obligations" is defined to include income from any source, however irregular — and, notably, it extends to the means and obligations of another adult in your household where you customarily share your means and mutually bear each other's obligations. So a two-income household is properly assessed as one, not as a convenient half.

The provider may design its own assessment model, but the Act requires the model to produce a fair and objective assessment and to be consistent with the affordability assessment regulations the Minister is obliged to make. Those regulations set out the mechanics; the statutory duty above is the part that does not change.

The defence a provider will raise

There is one complete defence, and it has two limbs that must both be satisfied.

It is a complete defence if:

you failed to fully and truthfully answer requests for information made as part of the assessment; and
a court or the Tribunal determines that your failure materially affected the provider's ability to make a proper assessment.

Both. Understating a debt that would have made no difference to the decision is not, on the face of the Act, enough — the failure must have materially affected the assessment.

The practical lesson runs the other way too, and it is worth stating bluntly. When you apply for credit, answer honestly and completely. Concealing an existing obligation to improve your chances is exactly what hands the provider this defence later.

What over-indebted means

You are over-indebted if the preponderance of available information at the time of the determination shows that you are or will be unable to satisfy, in a timely manner, all the obligations under all the credit agreements to which you are a party — having regard to your financial means, prospects and obligations, and to your probable propensity to pay as shown by your repayment history.

Note the breadth: all obligations under all agreements. It is a whole-position test, not an assessment of the one loan in dispute. And it turns partly on likelihood — "is or will be unable" — rather than requiring you to already be in default.

What a court or the Tribunal can order

This is where the remedy earns its reputation, and the powers differ depending on which route to recklessness applies.

Where the agreement is reckless because no assessment was done, or because you did not understand the risks, the court or Tribunal may make an order:

setting aside all or part of your rights and obligations under the agreement, as it determines just and reasonable in the circumstances; or
suspending the force and effect of the agreement.

The first of those is the one people find hard to believe. A court may set aside the obligations under a credit agreement. Not reduce the interest rate — set aside, in whole or in part, as is just and reasonable.

Where the agreement is reckless because it made you over-indebted, the court or Tribunal must go on to consider whether you are over-indebted at the time of those proceedings. If it concludes that you are, it may suspend the agreement until a date it sets, and restructure your obligations under your other credit agreements.

Before making that order it must consider your current means and ability to pay the obligations that existed when the agreement was made, and the expected date on which the obligations will be fully satisfied under any proposed order.

What "suspended" actually means, and it is stronger than it sounds

Freezing an agreement sounds like a deferral — pause now, catch up later. The Act does not work that way.

While an agreement is suspended:

you are not required to make any payment under it;
no interest, fee or other charge under the agreement may be charged to you; and
the provider's rights under the agreement, or under any law in respect of it, are unenforceable, despite any law to the contrary.

And when the freeze ends, the rights and obligations revive and become fully enforceable — except that the Act adds, "for greater certainty", that no amount may be charged to you for the interest or fees that could not be charged during the freeze.

So the charges that would otherwise have accrued are not parked and reapplied. They are gone. On a long agreement at a high rate, that is the substance of the remedy, and it is why a freeze is not a soft outcome.

Where the argument does not apply

The reckless credit provisions have real boundaries, and it is better to know them at the start.

They do not apply where the consumer is a juristic person — a company, close corporation or trust. This is a protection for people, not for entities.

And the reckless credit sections specifically do not apply to:

a school loan or a student loan;
an emergency loan;
a public interest credit agreement;
a pawn transaction;
an incidental credit agreement (for example, interest added to an overdue account); or
a temporary increase in the credit limit under a credit facility.

The first three carry conditions: credit extended under them must be reported to the National Credit Register in the prescribed manner, and for an emergency loan the provider must obtain and retain reasonable proof that the emergency existed.

That last condition is worth remembering. If a loan was written up as an emergency loan, the provider needed proof of the emergency at the time. A short-term lender cannot simply label an ordinary loan an emergency one to sidestep the assessment duty.

A widely repeated claim that is not yet law

You will find sources stating that a debt counsellor is obliged to report a suspected reckless agreement to the National Credit Regulator or to the Magistrate's Court.

That provision exists in the statute book, but in the consolidated Act it sits under the heading "Uncommenced amendment" — it has not been brought into operation. The same is true of a further amendment to the over-indebtedness section dealing with debt intervention. Treat descriptions of either as current law with care.

What is in force is section 85: in any court proceedings in which a credit agreement is being considered, if it is alleged that you are over-indebted, the court may refer the matter to a debt counsellor for evaluation and recommendation, or declare you over-indebted and make a restructuring order.

That matters most at the worst moment. If a provider has taken you to court, the court hearing that matter has power to look at your whole credit position rather than only at the claim in front of it.

How this is raised in practice

You cannot declare your own agreement reckless, and no adviser can declare it for you. A court or the Tribunal makes the declaration. Realistically it reaches them by one of three routes:

Through debt counselling. A counsellor assessing your position may identify an agreement that looks reckless and raise it as part of the process. Our guides on what debt review is and what debt counselling costs explain how that process works and what it does to your credit record while it runs.
As a defence when you are sued. Where a provider goes to court to enforce, the recklessness of the agreement can be raised in those proceedings — which is also where section 85 becomes available.
Through a complaint to the National Credit Regulator, which may refer a matter to the Tribunal.

If you think the argument may be available to you, the evidence is documentary and it is worth assembling before you speak to anyone:

Your application and everything you submitted with it. What did the provider ask for, and what did you give it?
What the provider did with it. Was a credit report drawn? Were payslips or bank statements requested? Was your existing debt discussed at all?
Your position at the time you signed, not now — income, existing obligations, and what a reasonable look at your bank account would have shown.
The agreement itself, in full.

You are entitled to your credit record and it is the natural starting point; our guide to reading your credit report covers what is in it. If the answer to "was an assessment done?" turns out to be no, that is the strongest version of this argument, because the outcome of the assessment that was never done is irrelevant.

This is also a point at which proper advice pays for itself. The remedy is significant enough that it is worth putting in front of someone who litigates it, rather than raising it informally with a call centre.

For everything else, start at our money guides.

Frequently asked questions

What is reckless credit in South Africa? A credit agreement is reckless if, when it was made, the credit provider failed to conduct the assessment the National Credit Act requires, or conducted it and lent anyway despite information showing that you did not understand the risks and obligations, or that the agreement would make you over-indebted.

Can a court really cancel my debt? A court or the National Consumer Tribunal may set aside all or part of your rights and obligations under a reckless agreement, as it determines just and reasonable, or suspend the agreement's force and effect.

What if I could actually afford the loan? Where the provider simply failed to do the assessment, the agreement is reckless irrespective of what an assessment would have concluded at the time.

Does it help that my income has improved since? No. The criteria are applied as they existed when the agreement was made, without regard to your ability to meet the obligations at the time the determination is being made.

I lost my job after signing. Is my loan reckless? Not on that basis. The test looks at the provider's conduct when it lent. Hardship arising afterwards is addressed through debt review and other remedies instead.

What can the lender say in its defence? That you failed to answer its requests for information fully and truthfully, and that a court or the Tribunal finds this materially affected its ability to assess you. Both parts are required.

What happens while an agreement is suspended? You need not pay, no interest or fee may be charged under it, and the provider's rights are unenforceable. When the suspension ends the agreement revives, but the interest and fees that could not be charged during it may not be charged afterwards either.

Which agreements are excluded? The reckless credit provisions do not apply where the consumer is a juristic person, nor to school or student loans, emergency loans, public interest credit agreements, pawn transactions, incidental credit agreements, or temporary credit-limit increases.

Must a debt counsellor report reckless lending? That obligation appears in the Act as an uncommenced amendment and is not in force. What is in force is the court's power, where over-indebtedness is alleged in proceedings, to refer the matter to a debt counsellor or to declare over-indebtedness and restructure.

Does my partner's income count in the assessment? It can. The definition of financial means, prospects and obligations includes those of another adult in your immediate family or household where you customarily share means and mutually bear obligations.