The Western Cape High Court is set to hear a landmark case which will have major implications for indebted South Africans.
The case has been brought by Stellenbosch Law Clinic and Summit Financial Partners who are seeking intervention on the manner in which debt is collected.
The applicants are expected to argue that the country’s debt collectors have added unnecessary costs (such as legal and administration fees) 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 in duplum rule.
As outlined in the National Credit Act, the in duplum rule holds that interest cannot accrue to more than the capital amount.
The law clinic will argue that debt collection in South Africa should be regulated in this regard and that costs must be capped.
“When a consumer defaults on payment of an account, credit providers have a limit on the amount of fees and charges they can add to the agreement,” explained Neil Roets, CEO of Debt Rescue.
“These charges cannot equate to more than what is outstanding at the point of default, according to what is referred to the ‘statutory in duplum’ rule, or S103(5) of the National Credit Act.
“These charges include interest, fees and legal costs. However, if there is a re-arrangement or agreement pertaining to payment of this default amount, some credit providers are claiming that the default has been cured and start adding fees again,” he said.
“In this case, the court needs to give clarity on what constitutes the curing of a default payment, which will explain what the limits are that can be charged, when they are applicable and how they are to be calculated.”
Taken for a ride
Roets provided a hypothetical example of the loophole being used by some of these credit providers.
“If a consumer were to take out a loan for R500, which has to be repaid in 3 instalments and then skips the first instalment, he would then owe R500 plus interest,” he said.
“If the interest was R50, the maximum amount that the consumer would have to repay would be R1,100. If the consumer then pays R100 for the next 11 months, the account should be settled, with the additional interest added.
“However, what is happening is that the consumer is also held liable for legal recovery costs and administration fees, which could leave a consumer with a massive balance and he could end up paying R5,000.”
Important for indebted South Africans
Roets said that it was very important to clarify the interpretation of the ‘in duplum rule’, as the various interpretations are leading to consumers potentially paying excessive amounts in fees and charges, that they are not liable for.
“There is a very clear need to ensure that all parties know what their rights are in this case, with clear rules to avoid uncertainty and confusion,” he said.
“As it stands currently, a consumer can potentially repay ten times the amount of the loan that was originally taken.
“It’s estimated more than R1 billion has been illegally over-deducted from thousands of distressed debtors by unscrupulous credit providers.”