Collection costs judgment brings relief for millions of debtors

If you’re paying off debt via a garnishee order or have paid off any debts in this way over the past three years, you’ve probably been overcharged in legal and other fees, and could be due a refund.

This is according to Clark Gardner, CEO of Summit Financial Partners, commenting on a judgment handed down on December 13 in the Western Cape high court.

The judgment, which Gardner describes as “ground-breaking”, will bring immediate and much-needed relief to about 1.3-million consumers who are paying debt by garnishee order — the common name for an emoluments attachment order (EAO). An EOA is a court order “attaching” a portion of an employee’s income to pay to creditors.

The judgment arose from a case brought by Summit and the Stellenbosch Law Clinic on behalf of 10 consumers with EAOs. They asked the court for an order defining “collection costs” in terms of the National Credit Act (NCA).

The act limits the fees — including “collection costs” — that you can be charged when you default on your debt. The definition of collection costs has been a bone of contention for years, with credit providers and lawyers arguing that it excludes legal fees.

The effect on debtors has been punishing. In the case of one applicant in the case, legal fees and interest added R5,000 to his initial debt of R700.

Summit and the Stellenbosch University Law Clinic asked the court to only allow collection costs that were checked (taxed) by a court and to apply the statutory in duplum rule to these costs. This rule limits interest and all costs to double your capital outstanding at the time you default on your debt.

Gardner estimates that 80% of consumers with EAOs have been overcharged legal fees, interest or other charges, and that they could be due a refund as a result of the judgment. He says that in future, short-term credit will be advanced in a more responsible manner because credit providers are no longer immune to the cost of using attorneys to collect short-term debt.

Class action

Stephan van der Merwe, a senior attorney at the Law Clinic, says the Law Clinic and Summit plan to launch a class-action in the hopes that more debtors benefit from the redress given to those in the case.

Acting judge Bryan Hack ordered that an independent expert be appointed within 90 days to recalculate the outstanding amounts of the EAOs granted against the debtors ,as per the judgment. The judge also ordered that the lenders provide the expert and each of the debtors copies of the consumers’ quotes, credit agreements, current statements, and statements on default date.

The consumers must be paid any amounts due to them within seven days of the lenders being given the recalculation, the judge ordered.

The judgment is another huge victory for the Law Clinic and Summit, following their 2015 case to put a stop to the abuse of EAOs, which were widely used for the collection of unsecured debt.

That high court application culminated in the Constitutional Court declaring aspects of the Magistrates’ Courts Act unconstitutional and, since the judgment in 2016, EAOs can’t be granted without judicial oversight or in jurisdictions far from the debtor. Since then there has been a dramatic decline in the use of EAOs.

Gardner says it’s noteworthy that in this case, the applicants were opposed by, among others, the National Credit Regulator (NCR), the very entity tasked with acting as a “referee” in the credit market. “We have acted as a referee in the absence of the NCR. Consumers have had no one on their side. It has been incredibly difficult for us to stand in the gap. It’s not our day job — we would prefer to regulator to do it — and all our costs are not recovered in the cost order.”

Although the NCR did not oppose the applicants’ definition of collection costs, it did not agree with their definition of statutory in duplum, arguing that it applies up to the date of default. After default, the regulator said, the credit agreement is replaced by a new agreement and common law in duplum then applies.

The Banking Association SA (Basa); the Legal Practice Council (LPC), which regulates attorneys and advocates; and Bayport also opposed the application.

The judge granted Summit and the Law Clinic all the orders they sought. The LPC and various credit providers listed as respondents in the matter were ordered to pay the applicants’ costs, including the cost of three counsel.

The NCR did not respond to requests for comment.

What it means for you

What the judgment effectively means is that if you’re in default on any of your credit agreements, 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. It also applies for as long as you are in default and until you have purged your debt.

So, if the capital owed by you at the time you defaulted was R500, you can’t be charged more than R500 in interest and legal fees.

The judgment says collection costs includes all legal fees incurred by the credit provider “before, during and after litigation” against a debtor. Furthermore, collection costs recovered by a credit provider can’t be passed on to you unless they have been taxed (checked by the court) and agreed to be paid by you.