Credit providers will face fines of up to R1-million or 10% of their annual turnover if they lend money recklessly, if amendments to the National Credit Act become law.
The government has published proposed amendments to the act, with the support of all political parties, that have thrown a much- needed lifeline to the over-indebted.
At the end of March, 24.6million people were credit-active, with nearly 40% (9.69million) considered to be over-indebted - having accounts that are either three or more months in arrears or who have default judgments against them.
According to the National Credit Regulator's Consumer Credit Market Report, by June total consumer debt had risen to R1.72-trillion.
Mortgages accounted for R889.11-billion of the debt, while unsecured and developmental credit accounted for R165.41-billion and R41.08-billion respectively.
Developmental credit is money lent for the development of a business.
Credit facilities - which consist mainly of credit cards, in-store cards and bank overdrafts - account for R15.32-billion.
The amendments, on which the public has until January 15 to comment, were proposed by parliament's trade and industry portfolio committee.
Generally welcomed by economists, they cater specifically for the destitute, people earning R7,500 or less a month, the disabled, people who have been retrenched and women or children who head a household.
They propose that credit insurance be mandatory.
The portfolio committee's chairman, Joanmariae Fubbs, said the committee launched the bill because if it had been left to the Department of Trade and Industry it would have taken three years to pass.
"Doing it this way, we can get the amendments, which were unanimously supported by all political parties, passed in a year.
"These amendments are designed to address the urgent interventions needed to deal effectively with South Africa's debt trap from which the vulnerable cannot escape."
She said the bill was not a "get-out-of-jail free card", but was designed to promote responsible lending and a savings culture, and to protect the most vulnerable.
"It addresses consumers' over-indebtedness and ensures that, before creditors lend money, they ascertain exactly what the earnings are that come into a consumer's home."
She said the amendments would require that mandatory credit insurance policies were in place before loans were granted.
"This means all agreements longer than six months and for no more than R50 000 will be protected in value to prevent consumers through serious and unexpected changes in circumstances, such as the death of breadwinners, from falling into debt traps."
Debt Rescue chief executive officer Neil Roets said the inclusion of penalties was welcome.
"It not only stops consumers trying to get out of paying their debts, but ensures that reckless lenders are dealt with effectively."
He said that, for the first time, lower-income people, who were not currently protected by the provisions of the act, would be.
"It specifically caters for the destitute, woman-headed households, the disabled, minors, those who earn less than R7,500 and those who are retrenched," Roets said.
Under the current act, an applicant for debt review must have an income. The amendments would dispense with that requirement.
"Now consumers whose principal debt is less than R50,000 are catered for.
"These amendments allow people to approach the National Credit Regulator and its tribunal direct for relief [without charge], cutting out expensive legal costs."
Paul Slot, president of the Debt Counsellors' Association of SA, described the amendments as an "urgently needed lifeline".
"There are many low-income earners who are unable to get themselves out of debt. This bill addresses the gaps the poor fall through."
"Every month 15,000 people apply for debt relief, with South Africans on average spending 60% of their after-tax income on debt repayments, when it should be only 35%.
"Under these amendments, debtors can have their repayments restructured over a longer period, with creditors offering fee and interest-rate concessions.
"In the past, if you were poor, debt reviews were almost impossible to obtain because of the costs of hiring lawyers to fight for [reviews] in courts."
The amendments, said Slot, would allow consumers to approach the National Credit Regulator and its tribunal directly under the new debt intervention provision.
"[The amendments] will make it a criminal offence for creditors to try to collect debt after the three-year non-payment period. If someone has not paid a debt for three years because of unforeseen circumstances, creditors cannot collect the debt."