Courts defend debtors from costly practices
As a debtor, you're better protected than ever since recent landmark rulings that have put a stop to practices that could add to your distress when you default on your repayments. One stops creditors from taking legal action in an expensive high court instead of a magistrate's court and the other protects you from excessive charges, especially legal fees, when you default.
Late last year, acting judge Bryan Hack handed down a declaratory order in the Western Cape High Court, finding that "collection costs", as defined by the National Credit Act (NCA), include all legal fees incurred by a credit provider before, during and after litigation against you, as the debtor. Furthermore, these costs can't be passed on to you unless they have been checked by the court or agreed to by you.
Hack also provided legal clarity on statutory in duplum(a Latin phrase meaning "double the amount"). In common law, the in duplum rule provides that interest on a debt will stop running once arrears interest has accrued to an amount equal to the outstanding principal debt. But the NCA introduced statutory in duplum to cap not only interest, but all other costs - such as service fees, credit insurance, default administration charges and collection costs - from running up after you've defaulted on your debt.
Since the statutory in duplum rule offers better protection to consumers than its common-law counterpart, it has been a bone of contention for years, with lawyers arguing that legal fees are not included in "collection costs" and credit providers having varying interpretations of how in duplum must be applied, pre- and post-judgment.
But the Hack judgment clarifies that legal fees are indeed included in collection costs and that the statutory in duplum rule applies as long as you are in default and irrespective of whether judgment has been made against you.
This means that if you're in default on a credit agreement, the maximum you can be charged is double the capital amount outstanding at the time of your falling into default - and this applies to all fees, not just interest. So, if the capital you owed at the time that you defaulted was R500, you can't be charged more than R500 in interest and all other fees.
The judgment will have a significant impact on debtors, especially those paying their debts by emoluments attachment - or garnishee - orders.
Cases of consumers being charged legal fees and interest of up to R5,000 on an initial debt of R700 have been reported. This places consumers in a debt spiral with little hope of paying off their debt in a reasonable time.
Bayport, one of the largest non-banking providers of unsecured credit in SA and a respondent in the case heard by judge Hack, has applied to the court for leave to appeal against aspects of the judgment relating to statutory in duplum.
But Clark Gardner, CEO of Summit Financial Partners, says Bayport's appeal concerns only parts of the judgment, so the ruling is still useful to debtors seeking refunds on legal fees that were not taxed. And it can also be used by debtors who have garnishee orders that they want to stop because statutory in duplum applies.
"The judgment still forms a valid defence as to why garnishee orders should be stopped once interest and fees match the principal amount at the time of default. It is estimated that at least 50% of current garnishee deductions should be stopped immediately on this basis," he says.
Another important judgment for debtors last year was judge Murray Lowe's placing the onus on creditors to use the magistrate's court as the court of first adjudication of all NCA matters - and only in exceptional instances referring matters to the high court.
At the crux of the judgment is the obligation on financial institutions to consider the cost implications and the access financially distressed people have to justice when a court is considered.
Creditors have been known to litigate against debtors in the high courts, which are geographically less accessible than magistrate's courts, and require the appointment of advocates, the cost of which is inhibitive.
The judgment says a large number of defendants in matters involving credit transactions are historically disadvantaged people. They have, in most instances, been paying reduced instalments before defaulting.
"The arrears are frequently trifling in their amounts and insignificant to the banks, but not to the debtor.
"Prejudice to homeowners and debtors is substantial on default, thus all (or mostly at least) fall within the category of 'low-income persons' as contemplated in the NCA.
"The NCA is consumer legislation introducing a new form of protection for debtors in South Africa, rich and poor. It seeks to balance the inequities arising from unequal bargaining power between large credit providers and credit applicants .
"Provisions of the Magistrates' Court Act read with sections of the NCA provide that the magistrate's courts have jurisdiction over all NCA matters whatever monetary sum," the judgment says.
The banks justified their choice of the high courts saying they are quick and efficient and this limits the costs, achieves more reliable decisions - particularly on foreclosure and executions against property - and that defendants usually do not oppose as litigation follows the banks' extensive attempts to resolve the issue.
But the judge said the argument that defendants usually do not oppose litigation rings hollow on a number of levels. The fact that debtors don't oppose the cases against them in court does not relieve either the parties or the court of their obligations to protect their constitutional rights, said Lowe.
"Secondly, what possible reliance can be placed on non-defence where that party is not given an opportunity to appear in court and equally have his/her say?"
Inaccessibility to the courts goes against the principle of equality, the judge said.
To promote access to justice, civil actions or applications arising within the ambit of the NCA and thus falling within the magistrate's courts' jurisdiction should be instituted in the magistrate's court, the judgment said.