Stellenbosch Law Clinic won a ground-breaking judgment in the Cape High Court that would put a cap on the outstanding garnishee order amounts owed. Photo: Pexels

CAPE TOWN – A class action would be launched to recover billions of rand paid to credit providers, for legal fees and debt collection costs by consumers with garnishee orders over the past three years, Summit Financial chief executive Clark Gardner said. 

This was after the company and the Stellenbosch Law Clinic, representing 10 indebted clients, on Friday won a ground-breaking judgment in the Cape High Court that would put a cap on the outstanding garnishee order amounts owed, and the unregulated and unfair way in which debt collection costs had prejudiced the poor in the past.

The court case listed no less than 49 respondents, including the National Credit Regulator, Banking Association of South Africa, Minister of Justice and Correctional Services, Minister of Trade and Industry, Council for Debt Collectors, National Forum on Legal Profession, Law Society of South Africa, most of the major banks, South African Human Rights Commission, Consumer Goods Council and some of the major retailers such as The Foschini Group. Truworths, Mr Price Group, Edcon and Lewis Group. 

Gardner said about 1.3 million consumers were paying debts via garnishee orders on their salaries, while about 1.5 million were likely to have paid off or contributed to paying towards those orders in the past three years. He believed these could, on average, achieve up to R5 000 savings or refunds on legal fees and other costs on their amounts owing, potentially releasing more than R4 billion into the consumer economy. The costs of the court case were awarded to the key respondents.

Gardner said the judgment will have wide implications for the debt collection industry. The cap on debts collected on garnishee orders to double the initial debt, including costs, would provide clarity to banks and credit providers on the extent of debts owed to them. It would also encourage lenders to lend more responsibly, in that it may cost the lender too much to recover a small debt, in terms of legal fees and other costs. This should also help encourage consumers to stay away from mid-month short-term loans to rather take out longer term, lower cost loans, said Gardner.

Gardner said Summit and the Stellenbosch Law Clinic had taken on “incredible risk” in launching the litigation on behalf of their clients, because of the financial risk, because the case had required additional resources and personnel, and because it took the company outside of its normal functions.

He said there was a risk the case may be appealed, even though the judgment would likely put an end to the problem of “spiralling debt” among over-indebted consumers with emolument orders, a problem that all respondents, including those that claimed to have a mandate to represent the interests of consumers, had agreed was a problem.

Examples of how consumers overpaid for debt before the court included one applicant, who had borrowed R5 600, had paid R13 000, and still owed R13 300. Another borrowed R16 000, repaid R19 000, and still owed R13 800. Another applicant borrowed R6 000, paid R14 300 towards it, and still owed R10 000.

Judge Brian Hack said in the judgment these represented “a very small number of persons who are in the same debt spiral with allegedly little hope of paying off their debt in any reasonable period”. A major reason for the escalation of these debts were collection charges, often passed on when the debt was sold to another debt collector, and legal fees.

The judge did not mince words about the credit providers in the case before him. “None of the credit providers in this matter can be said to have attempted to resolve the dispute by adhering to the hallmarks of equity, good faith, reasonableness or equality. On the contrary again they have allowed costs to run up with apparent abandon,” Judge Hack wrote in his judgment.

“If equality requires all persons an equal right to access to credit, but consumers are not equal in their ability to pay, then it must equally mean that the cost of credit must be adapted accordingly. In reality, the converse has happened and the cost of credit for small loans is disproportionately higher than for large loans,” he said.

“But if the pursuit of profit results in the exploitation of the poor and ever widening disparity of wealth, this gives meaning to the other rubric that the rich are getting richer and the poor are getting poorer,” he noted further in his judgment in relation to how the National Credit Act, was meant to be interpreted to curb the further enslavement of the poor in spiralling debt.

He declared that, without changing any laws, that the amount owing by debtors under emolument attachment, would be limited to double the debt, including costs, from the time that the debt was incurred.

He also declared that “all collection costs should include legal fees” incurred by the credit provider, and that all legal fees on debt collection should be approved by the court taxing master as other legal fees are, or should be agreed to by the consumer.

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