Reckless lending is just one cause of over-indebtedness. Overcharging of interest by the lender and collection costs can also push you into a state of over-indebtedness.
A case heard by Judge Siraj Desai in the Western Cape High Court this month demonstrates how your debt can escalate once you are in default, and how credit providers collect such debt.
The debtor, who may not be named, lives in the Cape Flats. She is a 44-year-old single mother of two school-going children and has dependent parents. She works for a non-profit organisation and earns a gross income of R5 000 a month.
The court heard how, in 2010, she was granted a loan of “about R3 500” from SA Multi Loan. She does not have a copy of the credit agreement and is uncertain of the original loan amount, the court heard. She serviced the loan until her employer was unable to pay her. In 2011, when her employer started paying her again, she went to SA Multi Loan to arrange to resume paying the loan. But SA Multi Loan was no longer there; in its place was credit provider Bridge Corporate. The woman was told her debt had grown from R2 500 (presumably the outstanding balance at the time of default) to R6 000.
In terms of the National Credit Act (NCA), a credit provider would not be legally permitted to collect more than R5 000, in interest and all costs, from this debtor – provided the credit agreement was entered into after June 1, 2007 and subject to the NCA and the credit provider is registered.
Late in 2012, the woman was confronted at her home by a man who said he worked for a firm of attorneys. He told her she owed R9 500 and asked her to sign documents as proof that he had called on her. She says she felt under pressure and signed.
When an emoluments attachment order (EAO, see “Definition”, above) was later served on her employer, she explained to her manager that she could not afford the monthly deduction of R1 115. But an EAO is a court order, served on your employer, compelling your employer to deduct from your pay the amount stated on the order.
So the woman sent a letter to Bridge’s lawyers, Flemix & Associates, informing them that she was a single parent and could afford to pay only R150 a month. Flemix responded, stating that her “application” to pay R150 a month was declined, but that the attorneys could decrease the instalment to R950 a month.
The debtor sought help from the University of Stellenbosch Legal Aid Clinic (Uslac), which provides free legal services to about 3 000 indigent consumers a year and helps about 200 people a month with advice relating to EAOs.
Uslac, in turn, applied to the High Court on behalf of the woman and 14 other consumers who have EAOs against them. Uslac is the main applicant in the case against 13 credit providers, including Bridge, and Flemix & Associates, the debt collection attorneys used by these credit providers to obtain judgments and EAOs against the consumers who are applicants in the case.
“There is widespread public concern and evidence of endemic abuse of EAOs by credit providers, as well as allegations of systemic fraud and corruption in the process of issuing EAOs,” Kruger van der Walt, the director of Uslac, says in his founding affidavit.
He says that the Hawks are conducting a criminal investigation into some of the respondents – Flemix & Associates, Bridge Debt (also known as Experato) and Onecor – and two other entities: Bridge Loan and SA Micro Loan (also known as SA Multi Loan).
The applicants have applied to the court to declare as invalid and unconstitutional sections of the Magistrates’ Courts Act that allow for EAOs to be issued by a clerk of the court and that provide for the debtor to give written consent to the EAO being issued in jurisdictions (court districts) other than where the employer lives or conducts business.
The applicants say that the issuing of an EAO by a clerk constitutes an absence of “judicial oversight” – in other words, the scrutiny of a magistrate or judge. Without judicial oversight, there is no provision for an enquiry into the lawfulness of the debt and costs or into what a debtor can reasonably afford to pay towards the debt. This prejudices a number of the consumer’s constitutional rights.
The applicants say that by obtaining written consents to jurisdictions that would not ordinarily have jurisdiction it is practically impossible for the judgment debtor to exercise his or her right to have an EAO amended, suspended or rescinded, because of the cost and inconvenience of getting to this jurisdiction.
All the consumers who are applicants in the case live and work in the Western Cape, yet the EAOs against all but one of them were issued in magistrates’ courts in Kimberley, Johannesburg, Winburg and Hankey.
Van der Walt contends that it is inconceivable that the consumers would willingly and with informed consent have agreed to the attachment of their wages by a clerk of the court in a town hundreds of kilometres away.
This week, advocate Anton Katz, for the applicants, delivered his closing argument. Judge Desai said he would aim to hand down judgment on or before May 29.
HOW THE ACT PROTECTS YOU
At a recent conference on strategies to address over-indebtedness, Michelle Kelly-Louw, a professor of banking law at Unisa, said the NCA is supposed to prevent over-indebtedness that stems from a debt that escalates out of control.
The NCA provides for an all-inclusive limit on what a consumer in default can be charged. This limit includes not only interest, but also fees, credit life insurance and collection costs, which include legal fees.
But this section of the Act – section 103(5), referred to as statutory in duplum – has been repeatedly challenged by credit providers, and the National Credit Regulator (NCR) has issued a proposed guideline providing a new interpretation of this section of the Act.
The new interpretation provides for the limit to be re-applied on the debt if you default again. In submissions to the regulator, some debt counsellors have strongly opposed this interpretation, which they say effectively cancels out one of the most powerful protections in the Act.
Lesiba Mashapa, the company secretary at the NCR, told delegates at the Department of Trade and Industry conference that the proposed guideline may be issued as regulation under the NCA.
In a published paper, Kelly-Louw says that statutory in duplum offers a better form of debt relief than common law in duplum (which limits only the interest that can be charged when you are in default). Such relief is still lacking and desperately needed in South Africa, despite the availability of debt counselling and debt restructuring, she says.
“From a credit provider’s perspective, the operation of the statutory rule may be too harsh, but from a consumer’s perspective, it might just be that ‘little bit extra’ he needs to get out of his dire financial situation,” Kelly-Louw says.
Remember that section 103(5) applies to accounts in default until the credit provider takes judgment against you. Once the credit provider has obtained judgment, it is entitled to the prescribed rate of interest (nine percent a year) on the judgment amount (the total debt), excluding collection costs.
THE TROUBLE WITH EAOs
If you have an emoluments attachment order (EAO) against you, be wary of anyone offering to negotiate a rescission of the EAO with your creditor.
An EAO is a court order. It compels your employer to deduct from your wages or salary money that you owe a creditor who has taken default judgment against you.
“An EAO can’t be negotiated away, and nor can anyone ‘negotiate’ a rescission,” Deborah Solomon, the founder of the DCI, cautions. The DCI is a debt counselling industry portal and company that offers debt counselling services.
“The only way to obtain a rescission is by way of an application in the court where the default judgment was issued. It’s a legal process,” Solomon says.
To rescind a court order is to cancel or revoke it. An EAO can be rescinded if the debtor has a bona fide defence, which can include not consenting to the EAO, or the court not authorising the EAO, or it being brought in the wrong jurisdiction.
Even if you are able to get your EAO rescinded, you, the debtor, remain liable for the debt. This is because a default judgment is valid for 30 years. It does not prescribe. A debt prescribes, or lapses, only if your creditor does not institute civil proceedings against you within three years of your last payment.
An EAO can be reinstated within the 30-year judgment term.
Solomon says the DCI assists consumers to have their EAOs rescinded, and it has seen a trend among debt collection attorneys, such as Flemix & Associates, that once an order is rescinded, the attorneys try to have it re-issued.
“Employers need to be more vigilant when legal documents are served on them, and they need to challenge a sheriff attempting to serve an order that has been rescinded. Should this happen, it is the responsibility of the employer to report the matter to both the Law Society and the Sheriff’s Board, as these types of unscrupulous tactics are not uncommon in the ‘EAO industry’,” Solomon says.
EAOs are not only an easy method of recovering debt, they can also be lucrative to administer.
To compensate the employer for the administration of the order (which involves paying over the instalments to the credit provider or the credit provider’s debt collection attorneys each month), the employer is paid five percent of the amount deducted each month.
An industry of sorts has sprung up in the administration of EAOs, Solomon says. Players in this industry offer a solution to employers who find it onerous to manage their administration, and some are only too happy to outsource this function to companies that not only manage the payment of money to creditors, but also check on the legality of the orders. Employers are also beginning to recognise the importance of the financial well-being of their staff.
But Solomon says employers need to be careful who they engage to check the legality of these orders, because this work is specialised and calls for legal and other expertise.
On the face of it, many EAOs appear to be legal, but are not, she says. However, it can be complex to determine whether a consumer has a bona fide defence, because there are many factors to consider when seeking a rescission of this nature.
Solomon says a bigger problem is that a company being paid a percentage of the debt collected has no incentive to scrutinise the legality of the EAOs. She recommends that employers engage a company that is separate and independent of the administrator to check the legality of orders, as this introduces a healthy system of checks and balances.
“The administrator’s role is to pay the creditor and make sure that payments stop when the debt is paid in full. There’s nothing wrong with an administration company claiming the five percent monthly fee for administering the order, but problems arise when the employer had an expectation that the orders had been checked for legitimacy, only to find out later that this wasn’t done properly,” Solomon says.
The five-percent fee to administer the EAO (whether the employer is doing it or has outsourced the work to an administrator) is payable by the credit provider, and not the indebted employee. In other words, the fee should not come off the EAO amount.
“But that is not always what happens, and that is one of the abuses,” Frans Haupt, the director at the University of Pretoria Law Clinic, said at a recent conference hosted by the Department of Trade and Industry on strategies to address over-indebtedness.
Research by the University of Pretoria Law Clinic documents the problems with EAOs, including the use of fraudulent orders, gross over-charging of legal fees and the issuing of duplicate orders.
Haupt said employers had enlisted his department to audit EAOs and look for irregularities. “Attorneys are more afraid of losing business than they are of the Law Society. Lots of complaints have been lodged with [the law societies], but it doesn’t seem that justice is being done.”
Kalay Pillay, the deputy director-general of legislative development in the Department of Justice and Constitutional Development, told delegates at the conference that the department was working on the second draft of amendments to the Magistrates’ Courts Act dealing with EAOs.
Pillay said the amendments provide for an assessment of a debtor’s finances before an order is issued – to give the debtor a chance to make submission to the court on his or her indebtedness; for the order to be served on the debtor and not just the employer; and for the debtor to be given free monthly statements.
Stephen Logan, an attorney who specialises in credit law, says proposals made by the national credit industry steering committee are more extensive than the amendments being proposed by the Department of Justice and Constitutional Development.
“The proposal makes provision for EAOs to be limited to, at most, 30 percent of the gross income of the debtor. Many industry experts believe that even 30 percent is extremely high.
“The technical committee of the National Credit Regulator was considering the incorporation of the proposals into the regulator’s draft code of conduct for credit providers and to further limit the term under which EAOs may be used to collect debt to a maximum of five years. In addition, it was believed that all EAOs should be listed on the credit profiles of the debtors to improve the accuracy of affordability assessments,” Logan says.
Solomon says that, since an EAO is in respect of a judgment debt, it “must be reported to the credit bureaus and be reflected on your credit report, because it adversely impacts how much credit you can afford”.
An emoluments attachment order (EAO), incorrectly referred to as a “garnishee order”, is a court order that compels your employer to deduct from your wages or salary money that you owe a creditor who has obtained judgment against you. EAOs are a popular way of ensuring the repayment of unsecured loans. Experts in the credit industry say there are between three and five million of these orders in circulation. You can have more than one EAO granted against you.