How the ratings downgrade affects your debt: a legal perspective

[Featured image sourced from BusinessTech]

As of today, 07 April 2017, both Standard and Poor’s (S&P) and Fitch, two of the three international ratings agencies alongside Moody’s, have downgraded South Africa’s credit rating to sub-investment grade, or “junk status”. There has been a lot of discussion about how this could affect the exchange rate, international investment, taxes and government spending. But how does it affect the average person and what, from a legal standpoint, should you be aware of?

Before we start, it is important to note that there is no need to panic. Economic changes don’t usually happen too drastically, or overnight. Nonetheless, there are things that you should do to prepare yourself so that you are not caught financially off-guard by changes as they happen.

So what can the average person expect? The average person could be affected in five ways: taxes may increase, interest rates may increase, inflation may increase, job security may decrease and returns on your pension, provident and retirement funds will probably decrease. What this boils down to is more pressure on your pocket. That pressure will make it harder to save, invest, and – more critically – make it harder to repay debt and cover your day-to-day expenses. In this post we are going to focus on what happens when you can’t pay back your debt.

First of all, what is debt? Debt is when you have effectively borrowed someone else’s money that you need to pay back. Debt can take a number of forms. Home loans, vehicle finance, credit card debt, personal loans, store cards, cell phone contracts, and instalment sales are all forms of debt. With the pressure of interest rate increases and rising costs of expenses, it becomes harder to make your monthly repayments. If you don’t or can’t pay your monthly instalments, your credit provider can take a number of legal steps against you depending on you contract with them and the nature of the debt.

Ultimately, the law recognises a creditor’s right to be paid for what they have lent you. So if you stop paying, you don’t simply get to walk away without repercussions The law provides a number of ways for creditors to get their money back. Ultimately, each way puts your belongings and, sometimes, your livelihood and home at risk. Common legal routes to recoup unpaid debt are as follows:

  • Bonds over your immovable property (mortgage bonds) allow credit providers to sell off that immovable property to repay themselves. You might have a home loan secured by a mortgage bond over your house for instance.  If you default, the bond would allow the bank to sell your home.
  • Writs of execution allow creditors to sell your movable property (for example your car or furniture), and or your immovable property to pay themselves back.
  • Garnishee orders / emolument attachment orders allow a creditor to deduct money straight off your salary.
  • Orders of insolvency allow creditors to sell off your assets to repay themselves.

Over and above all of this, defaulting means that you run the risk of being black listed. If you are black listed you won’t be able to get credit in future. If you avoid black listing, you may run the risk of having your own personal credit rating downgraded. Just like the S&P downgrade, this will make credit institutions less inclined to lend you money, and if they are willing to lend you money, it will more than likely be at interest higher rates.

So basically, you need to avoid defaulting on your debt.

What you as a consumer and a debt holder can do to avoid default is to first and foremost “know your debt”. In other words, know exactly how much you have borrowed, and exactly how much you have to pay back on a monthly basis.

Secondly, “know your interest rates”. You need to know which of your interest rates are flexible and take steps to understand what an increase in the repo rate will mean for each of your repayments. Most debt is granted on a flexible interest rate. What this means is that if the reserve bank chooses to increase the repo or “prime” lending rate (which is likely to happen following a downgrade) your interest rate will also be increased.

Thirdly, “have a plan to reduce your debt”. Have a plan of how you are going to repay your debt. The best place to start to reduce debt is try to reduce your expenses and to use any extra money you have – after paying off your monthly repayments – to pay off your debt starting with the debt with highest interest rate.

Fourth, “try to avoid more debt”. Particularly avoid debt on medium-sized purchases and purchases you don’t need. That new TV may only cost you “R199 per month!!!” But that is adding to your debt burden, your risk of default, and usually, you will end up paying more for that TV over the long run than you will if you save up and buy it in a lump sum. Yes, this means you may not have as many nice things. But if interest rates increase you will be grateful that you are not drowning in debt.

Fifth, “downsize if necessary”. Do you really need that expensive car, that expensive house, or that fancy cellphone? Think about going simpler, smaller and cheaper. When it comes to debt, every little bit counts.

I hope this basic overview has been helpful. Over the weeks to come, we are going to run a number of articles on our “Realising Rights blog” to unpack the concepts set out in this article with the aim of helping you take control of your debt.

By Alexandra Ashton

Alexandra Ashton is an attorney heading up the LRC Johannesburg’s debt and housing department. She holds a BCom and an LLB with distinction from Wits.

Alex, with thanks to the continued financial support of Legal Aid South Africa, is currently working on assisting people who lost their homes as a result of the fraudulent Brusson Finance lending scheme to be restored with ownership of their properties.

Disclaimer: The opinions expressed by the Realising Rights bloggers and those providing comments are theirs alone, and do not reflect the opinions of the Legal Resources Centre. The Legal Resources Centre is not responsible for the accuracy of any of the information supplied by the bloggers.