Court action will expose South African debt industry’s ‘dirty little secret’: expert

The legal action taken by the Stellenbosch Law Clinic against all the major role players in the credit industry will expose one of the biggest scandals that has been plaguing debt collection industry for many years.

This is according to Neil Roets, CEO of debt counselling firm Debt Rescue, who said the scandal had been haunting indebted South Africans for many years, forcing them to pay debts that had long since expired according to the prescription rule.

“The legal action will hopefully also expose the massive scandal of unscrupulous debt collectors and attorneys piling on unnecessary costs to the point where the debt they seek to collect is many times the amount of the principal debt which is in direct contravention of the statutory in duplum rule that holds that interest cannot accrue to more than the capital amount,” Roets said.

He noted that Independent Online reported that the legal action had been filed in the Western Cape High Court, seeking judicial intervention on the manner in which debt is collected. It’s estimated more than R1 billion rand has been illegally over-deducted from thousands of distressed debtors by unscrupulous credit providers.

The Stellenbosch Law Clinic is seeking judicial intervention on the manner in which debt is collected. It believes debt collection needs to be regulated and that costs must be capped, Roets said.

The clinic is joined by Summit Financial Partners in representing 10 of their clients. All the major role players in the credit industry are involved, with 49 respondents, including all the major banks, the lending institutions, the ministers of Justice and Trade and Industry, and the National Credit Regulator, the debt expert said.

Stephan van der Merwe, senior attorney at the university’s Law Clinic, was quoted by IOL as saying that there was widespread abuse in the industry.

“We have a lot of situations where people have been garnished with emolument attachment orders against their salaries. When you sit down and look at it you find amounts in excess of five, six, seven times the principal debt and they’re expected to continue making payments on it,” he said.

In one case, a client was granted an initial loan of R600, but had paid back more than R5,000 – about eight times the initial loan amount. In another, a farm labourer, earning R2,000 a month, has R970 garnished from his monthly salary. Back in 2011, he was given a loan of R16,000 and has repaid in excess of R31,500 – yet the creditor alleges he owes R37,000.

Roets, a qualified attorney licensed to practice in South Africa as well as in the United Kingdom, said it has long been a “dirty little secret” in the credit industry that there was widespread corruption but nobody wanted to rock the boat because it was such a profitable business.

“We come across various forms of abuse ranging from bogus garnishee orders to blatant breaches of the in duplum rule where the amount allegedly owed by our client far exceeds the capital amount.

“It is long overdue that these practices are exposed for what they are – outright fraud. Fat cats are getting richer on the backs of poor working men and women by blatantly breaking the law or by conveniently misinterpreting it,” Roets said.

The law clinic is seeking a declaratory order that the statutory in duplum rule should be applicable to all the interest, the costs, including the legal fees that are levied against the debtor – irrespective of whether a judgment has been granted.

Debt Rescue stated that nowhere in the National Credit Act is a distinction drawn between legal fees and collection costs. Once the court has clarified allowable collection costs, the clinic wants it to order that an independent expert recalculate the applicants’ indebtedness and then order that if there is an overpayment, the money must be repaid to the debtors.

Van der Merwe stressed that he does not want to vilify small cash loan providers, the credit industry or attorneys in general. “We have an issue with unscrupulous guys who don’t play by the rules. We are not going to assist so called ‘professional debtors’ either, who abuse the system by getting loan after loan at creditors’ expense if there are no merits in their cases.”

Roets said that in 2016, the law clinic won a landmark case in the Constitutional Court, which found that several practices relating to the abuse of emolument attachment orders were unconstitutional.

He said that while South Africa had one of the best credit regulatory systems in the world, there are too many loopholes.

Read: 3 reasons why South Africa is one of the toughest places in the world to collect unpaid debts