Legal costs can bury you under never-ending debt
Since defaulting on his microloan, Marikana mineworker Lebogang Victor Mokate has paid R17,600 towards a principal debt of R5,000 - and debt-collecting attorneys acting for his creditor claim he still owes R8,557.
But he has already paid R7,600 more than what he can legally be charged in terms of the National Credit Act (NCA), according to court papers filed in the high court in Cape Town this month.
Mokate is one of 10 debtors, supported by the Stellenbosch University Law Clinic and employee wellness company Summit Financial Partners, who have applied to the court for an order declaring that a "proper interpretation" of the NCA means that all legal costs charged before, during and after litigation and passed on to you to enforce a credit agreement are covered by the definition of "collection costs" in the act.
The NCA puts a limit on the total interest and costs that can be added to your debt, but many creditors and debt-collecting attorneys argue that "collection costs" do not include all legal fees.
The applicants are also seeking an order declaring that attorney and advocate fees may not be claimed from a consumer or recovered by a credit provider unless they have been taxed (quantified by the court).
The 10 debtors are asking for a recalculation of their outstanding debts and to be reimbursed amounts paid in excess of what was due by them.
Root cause of Marikana
This month marks six years since the Marikana massacre, which claimed the lives of 34 striking miners in a single day. In his founding affidavit, Stellenbosch Law Clinic attorney and lecturer Stephan van der Merwe says the Marikana strike and ensuing violence was "the direct result of the desperation of miners to have their economic needs properly considered. Many of the miners were left with scarcely enough money to cover their basic living expenses after their monthly instalments were deducted from their salaries."
The same can be said of many of the 3,000 indigent debtors who seek legal advice from the law clinic every year. "Issues relating to debt relief and exploitative lending practices have consumed a significant portion of the law clinic's time and resources," Van der Merwe says in his affidavit.
The debt repayments of these consumers are often "completely disproportionate to their monthly wages, and collections are made for amounts up to 10 times the initial debt", he says.
The applicants say this is partly due to the incorrect application of section 103(5) of the NCA by credit providers and debt collectors, who "uniformly apply a definition of 'collection costs' which excludes legal fees", Van der Merwe says.
Section 103(5) is commonly referred to as the "statutory in duplum rule", because it differs from the common-law in duplum rule. The latter states that interest on a debt in default stops running once it equals the outstanding capital amount at the time of the default.
However, section 103(5) of the NCA prevents the aggregate sum of interest and a host of charges - including "collection costs" - from exceeding the principal debt outstanding at the time of default.
Among the 48 respondents to the application are the National Credit Regulator, the minister of trade & industry, the minister of justice &correctional services, six firms of debt-collecting attorneys and six creditors who are acting against the debtors (execution creditors).
The collecting attorneys include Flemix & Associates, and the execution creditors include Onecor, both respondents in a previous case brought by Summit and the law clinic, which dealt with the abuse of emoluments
attachment orders (EAOs) used to collect debts from employees' wages and salaries.
All of the big banks and clothing retailers are also cited, as well as MicroFinance SA, the Banking Association SA, the Consumer Goods Council of SA and all of the law societies. The South African Human Rights Commission has been included and invited to act as a friend of the court, which it did in the EAO matter brought by Summit and the law clinic.
Van der Merwe's affidavit says the application is a "natural extension" of that case in that both focus on protecting consumers who have defaulted on their debts during the collection of that outstanding debt.
The application is, however, not the first of its kind. In 2016, a similar application was made to the high court in Mahikeng to interpret section 103(5), broaden judicial oversight over the execution process, and stop the debt-collection industry from collecting untaxed legal costs through EAOs.
Several of the respondents in the latest application were parties in the Mahikeng application, which concerned about 750 consumers who had been given relatively small loans. Interest was left to run until it equalled the debt before the creditors obtained judgment and an EAO against the debtors to recover the debt, the interest and the attorneys' costs. The costs were untaxed and collected through the EAOs, resulting in repaid debt well in excess of the principal debt as it stood at the time of default.
"For example, a certain Mr Mothlabane had an outstanding principal debt of R3,000 prior to consenting to judgment. After paying R8,402 over a number of years, he still owed R7,381," according to the court papers.
"The correct interpretation and application of section 103(5) would result in the immediate release of thousands of debtors from crushing debt as it would have the effect that their debt would have, in fact, been paid in full," the affidavit says.
Why you need to understand ' statutory in duplum'
• Statutory in duplum, which section 103(5) of the National Credit Act is commonly known as, protects you from exploitation by creditors by limiting the costs that you may be charged when you are in default. This is to prevent you from being charged exorbitant fees relative to your actual debt.
• It states that once the sum of the charges, including interest, listed in the act equal the principal debt outstanding when you defaulted, no further charges may lawfully be levied against your account until you have purged the default.