RECKLESS debt collections and emolument attachment orders (also known as garnishee orders, which allow creditors to dock debtors’ salaries and wages directly from their employers) are back in the spotlight with a David-versus-Goliath case that is expected to be heard in the Western Cape High Court in August.
The case has been brought by Stellenbosch University Law Clinic and Summit Financial Partners and 10 clients, who are seeking clarity on the interpretation of the “in duplum” rule and what charges are allowed to accrue to debtors’ accounts. The applicants hope to put an end to reckless debt collection, which is causing widespread misery, particularly in poorer communities.
The exhaustive application includes 49 respondents, including the Department of Trade and Industry, the National Credit Regulator, all the banks, Bayport Financial Services, the Finbond Group, the Debt Collectors Council, Foschini, Edcon, Lewis, various law societies and law firms.
Bayport Financial Services is cited for credit agreements with two of the clinic’s clients: one, a farm labourer, alleges in his supporting affidavit to the application that he was given a loan of R16000 in 2010, paid back an amount in excess of R31500 and, according to Bayport, still owes more than R37000. This means he is expected to repay more than R68500 to service his initial R16000 loan. His salary had been garnished for more than three years, with R917.81 deducted from his R2247.26 salary every month.
The other, a maintenance worker, was given a R12000 loan, repaid R33220 and still allegedly owed R7400.
In its replying affidavits, Bayport say it is fully within its rights to collect amounts approaching R65000 on the R16000 loan. It admits it has already collected more than R32500 from the debtor, and that “(his) account remains active, and Bayport will continue to enforce its contractual rights until the outstanding debt is recovered in accordance with the law”.
Bayport further admits it made an “error” in the second matter that has been brought to court and has “written off” the R7400 that was still being collected prior to the case.
In their reply, the applicants state they are “shocked” that Bayport feels justified in collecting amounts so disproportionate to the original loan, because this illustrates “Bayport’s ignorance of the spirit and aims of the NCA (National Credit Act)”.
The in duplum rule is a common-law rule that’s been on our books since the 1830s and has entered the public domain in recent years largely because of the behaviour of predatory debt collectors, who have added interest upon interest on debts, and lumped handsome collection fees on top of that.
The rule means that the interest accrued on a debt ceases once it equals the original principal debt. For example: the total debt may not exceed double the original debt. So if you took a loan of R1000 that falls within the ambit of the NCA, the interest and collection charges should cease to run once R2000 is reached. In theory, that is.
But any payment made by the debtor after the cap has been reached means interest will again start to accrue on the principal amount.
In 2005, with the promulgation of the NCA, the rule’s ambit was widened.
The NCA provides that, despite any common-law provision or wording in a credit agreement to the contrary, the amounts that accrue while the consumer is in default under the agreement may not exceed the unpaid balance of the principal debt at the time that the default occurs.
The common-law in duplum rule was limited to arrear interest only. But section 103(5) of the Act widened its application to encompass all costs - including initiation fees, collection costs, credit insurance and administration charges - plus interest.
The statutory rule also applies over the period of the default, meaning a credit provider is not allowed to apply any further charges or interest - even though the debtor is making repayments - and whatever the manner of collection, including attorneys’ fees.
This favours the debtor, not the creditor, but some creditors and collectors have interpreted the in duplum rule to their benefit - charging as much as they please and causing widespread debtor hardship, because the recovered debt is many times the original amount.
The situation was perfectly summed up in a 2016 case involving furniture retailer Lewis, which shamelessly ripped off a 60-year-old gardener. It had charged him R17955 over three years for a washing machine that cost R5999.
In the Stellenbosch University Law Clinic case, the banks, represented by the Banking Association of South Africa (Basa), claim they are within their rights to charge collection fees, which include service, tracing, administration and legal fees - even after these costs far exceed the in duplum limit. And that, because there is no consistency among the banks in terms of how they recover debts, in duplum applies only before judgment is obtained.
Basa says if legal costs are counted as part of “collection fees”, its members’ recovery efforts will be hamstrung. And a consumer will have “no incentive whatever to pay what he pays under the credit agreement”.