What is reckless credit, and what happens if a court finds it?

Most people in trouble with debt assume the problem is entirely theirs. They borrowed, they could not keep up, and the consequences follow. What almost nobody is told is that South African law puts a duty on the lender first, and that a lender who ignored it can lose the right to be paid at all.

That is what reckless credit means, and it is one of the strongest consumer protections in the National Credit Act 34 of 2005.

The duty the lender owes before lending

Before entering into a credit agreement, a credit provider must take reasonable steps to assess whether you can actually afford it. Section 81(2) requires an assessment of:

• your existing financial means, prospects and obligations
• your debt repayment history as a consumer under credit agreements
• your understanding of the risks and costs of the proposed credit
• your rights and obligations under the proposed agreement

This is not a formality and it is not satisfied by a credit bureau score alone. The lender has to form a view about your actual ability to service the debt alongside everything else you are already paying.

When credit is reckless

Section 80 makes an agreement reckless in three broad situations:

The lender did not do the assessment at all. If the required assessment was not conducted, the agreement is reckless regardless of whether you could in fact afford it. The failure itself is the problem.

The lender did the assessment but ignored what it showed. Where the assessment indicated that you did not understand or appreciate the risks and costs, or the obligations, and the lender proceeded anyway.

The agreement made you over-indebted. Where entering into the agreement would leave you unable to satisfy all your obligations in a timely manner, and the lender granted it regardless.

The third is the one most consumers recognise: the loan that was obviously unaffordable the day it was signed.

What a court must do about it

This is the part that surprises people, including some lenders.

When a matter comes before a court, typically because the lender is trying to enforce the debt, and the court finds that the agreement was reckless, the court must make one of the orders in section 83. It has no discretion to find recklessness and then do nothing about it.

The orders available are serious:

Setting aside all or part of your rights and obligations under the agreement. Not reducing the balance: extinguishing the obligation, in whole or in part. You can be released from the debt entirely.

Suspending the force of the agreement. Section 84 explains what suspension actually means, and it is stronger than the word suggests. During the period of suspension you make no payment under the agreement, and the credit provider may not charge any interest, fee or other charge in respect of that period. The debt does not quietly accrue in the background and land on you at the end.

Declaring you over-indebted and restructuring your obligations, which is the same relief a debt review produces but ordered by the court.

There is a further consequence people miss. Where an agreement is set aside, the lender must update its records, which means the adverse listings flowing from that agreement, the defaults, the arrears and any judgment, should come off your credit record. Our guide on disputing a listing on your credit report covers how to follow that through when it does not happen by itself.

The defence that defeats most claims

Section 81(4) gives the credit provider a complete defence if you failed to answer the lender's affordability questions fully and truthfully.

This matters enormously in practice, and it is the reason many reckless lending claims fail. If you understated your other debts on the application, or overstated your income, or did not disclose obligations you were already carrying, the lender can rely on that. The protection exists for consumers who answered honestly and were lent to anyway.

So the first question in any reckless credit claim is not what the lender did. It is what you put on the application form. Get a copy of it before you do anything else.

How to raise it

Reckless credit is not something that happens automatically. Somebody has to raise it, and there are three routes.

As a defence when you are sued. If the lender issues summons, reckless credit is raised in your plea. This is the most common route and it is why a section 129 notice should never be ignored: it is the step before summons, and it is your warning that the clock has started.

Through a debt counsellor. A debt counsellor assessing your position must consider whether any of your agreements were reckless, and may refer the question to a magistrate's court as part of a debt review. Our guide on how long debt review takes sets out that process.

Through a complaint. The National Credit Regulator can investigate reckless lending, and the National Consumer Tribunal can impose administrative penalties on a credit provider. That route punishes the lender but does not by itself release you from the debt, so it is a complement to a court claim rather than a replacement.

The evidence that decides it

Reckless credit claims are won and lost on documents, and the documents are mostly in the lender's hands.

Ask for, in writing: the application form you completed, the affordability assessment the lender says it conducted, the documents you supplied, the credit bureau report the lender obtained at the time, and the pre-agreement statement and quotation. You are entitled to records of your own agreement.

Then assemble your side: your bank statements for the three months before the agreement, your payslips, and a list of every other credit agreement you had running at the time.

The question a court asks is simple. On the day this was granted, what did your income and obligations actually look like, and could a lender that had done a proper assessment have concluded you could afford it?

What happens to the security

Where the credit was secured, over a car or a house, the question people ask immediately is whether a reckless finding stops the repossession.

It can, and that is often the whole point of raising it. A lender enforcing a secured agreement has to come to court, and if the court finds the agreement reckless it must make a section 83 order rather than simply granting the relief the lender asked for. An agreement that has been set aside cannot support an attachment; an agreement that has been suspended cannot be enforced during the suspension.

That does not make the asset yours for nothing in every case. A court may set aside part of the obligations rather than all of them, and where the consumer has had the use of the asset the outcome usually reflects that. But the difference between defending a repossession with a reckless credit plea and not defending it at all is frequently the difference between keeping the vehicle and losing it. Our guide on whether the bank can repossess your car without a court order sets out the steps a lender must take first.

Lenders who were never registered

A related problem sits alongside reckless credit and is worth checking at the same time.

A credit provider that is required to be registered under the National Credit Act, and is not, is in a far weaker position than one that simply lent badly. Unregistered lending is where the worst conduct clusters: the holding of bank cards, identity documents and SASSA cards as security, which is prohibited outright, and interest far above what the Act permits.

If the person who lent you money is not a registered credit provider, raise that first, because it goes to the validity of the agreement itself rather than to the manner in which it was granted. The National Credit Regulator maintains a register and it is free to search.

Worked example

This example is illustrative. Nomvula earns R11 000 a month net. She already has a vehicle finance instalment of R3 400, a store account at R600 and a personal loan at R1 900. She applies for a further personal loan with an instalment of R2 800. She discloses all of her existing debt on the application. The loan is granted the same day.

Her total credit instalments would be R8 700 against R11 000 of income, leaving R2 300 for rent, food, transport and everything else. On those figures no proper assessment could have concluded that the loan was affordable.

If the lender cannot produce an assessment showing how it reached the opposite conclusion, the agreement is likely to be reckless. A court finding that must then make a section 83 order, and the realistic outcomes range from suspension of the agreement, during which Nomvula pays nothing and no interest runs, to setting her obligations aside altogether.

Change one fact and the answer changes. If Nomvula had left the existing personal loan off the application form, section 81(4) gives the lender a complete defence, and she is simply liable for the debt.

What this is not

Reckless credit is not a route out of a debt you can afford and would rather not pay. Courts see attempts at that and deal with them briskly. It is also not retrospective regret: the test is what the position was on the day the agreement was made, not what happened afterwards. Losing your job a year later does not make the original grant reckless, although it may make you over-indebted, which is a different remedy with a different process.