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Chapter 12 - Consumer Law

Repaying debt

Legal consequences of defaulting on debt obligations

If a consumer has any problems repaying their debts, the first thing to do is to contact the creditors immediately. If they do not make an alternative payment arrangement with the creditor, the creditor can hand the matter over to a debt collector or lawyer who will take legal action against the consumer to recover the money owing. If this happens the consumer will end up paying much more for the debt, because of extra interest and legal charges,  and will definitely be worse off than before.

For many consumers the experience of receiving legal letters and documents and visits from sheriffs and debt collectors is frightening, confusing and humiliating. Below describes a process that is usually followed when a consumer fails to pay a debt or to make an arrangement with a creditor.

Steps taken for repaying debt

Step 1: Phone calls and letters of demand

Some companies will phone a consumer when they default – this is the best option for the consumer who should take advantage of this and offer to pay as much as they can. Where there is an agreement, the consumer should confirm any telephonic agreement in writing and keep copies with fax coversheets as proof. Also they should make sure that they pay what they promise to pay  as this will avoid their account being collected through a court process.

A consumer may instead or also receive a letter demanding payment. The National Credit Act now makes this letter (called a section 129 Letter) compulsory before a creditor can take any legal action. The letter also has to advise that the consumer has the right to approach a debt counselor for help if the consumer is over-indebted.

When a consumer receives a letter of demand they should then either

  • contact the creditor and make an arrangement to pay,  or
  • if they cannot cope with all the debt that they have, contact a debt counselor

If the consumer disagrees with the claim or the amount that they say is owing, the consumer must act immediately contact the creditor, confirm what the consumer disputes in writing and ask for proof of the debt/balance of the debt.

If the consumer is still unhappy after negotiating with the creditor, refer the complaint to the next level:

  • if it is a Bank, contact the Ombudsman for Banking Services
  • if it is any other credit, contact the Credit Ombud or the National Credit Regulator

NOTE: As a paralegal it is important to act immediately to assist the consumer – it becomes very costly if the debt lands up being collected through a legal process.

The creditor must wait 10 working days from the date that they send a letter of demand, before they can take the legal process further.

Step 2: Signing Sections 57 or 58 documents or receiving a summons

If the consumer does not respond to the letter of demand, the creditor will usually send an agent to the consumer’s home or workplace to asked them to sign either:

  • a Section 57 Acknowledgement of Debt where the consumer signs that they owe the money (the amount will be stated), and that they promise to pay monthly instalments in that amount. They also sign that if they default again (do not pay) on any instalment as agreed, the creditor can take the documents signed to court, have a judgment taken against the consumer, and get an emolument attachment order against the consumer’s salary (see below);

OR

  • a Section 58 Consent to Judgment where the consumer agrees that judgment can be taken in court immediately and that a deduction can be made against the consumer’s salary.

The difference between a section 57 and 58 is that with a section 57 the consumer has a second chance. In other words, there is no judgment if the consumer keeps to the payment arrangement. With a section 58, the consumer agrees to judgment immediately.

After sending a letter of demand, instead of sending an agent to visit the consumer to sign a s57 or s58, the debt collector/lawyer can get the sheriff of the court to serve a summons on the consumer – usually at home or work or at the address the consumer provided in the original contract (this is called the “domicilium” address). If the consumer receives a summons s/he has 5 working days to advise in writing that they want to defend the case.

If the consumer does owe the money there is no point in defending the case. The best way to respond is to call the attorney and make an arrangement to pay them monthly instalments. Suggest that they do not take judgment and ensure that the consumer keeps to this agreement. Also put what you have agreed in writing and send them a copy (keep proof).

If the consumer does not owe the money, or does not agree with the amount that they say is owing, the consumer should immediately contact the attorney and advise in writing that s/he disputes the claim or the amount.

Try to get this dispute resolved without going to court, but if the attorney is not co-operative, the consumer must give notice that s/he wants to defend the case. A Notice of Intention to Defend is attached to the back of the summons and must be filled in by the  consumer, and taken to the address provided. Once they have signed receipt, s/he must take the original and a copy signed by the creditor to the Clerk of the Court.

At this stage it will be necessary to have an attorney to assist which can be expensive. Therefore is it always best to first try and negotiate a settlement or an agreement.

Judgements and other court orders

If the consumer signs a section 57 and then defaults (doesn’t pay in terms of the agreement), or signs a section 58, or if the consumer does not respond to a summons, the court will order judgment against the consumer for the amount owing plus interest and costs. The court can also award any of the following orders relating to how the  creditor will recover the money from the consumer:

A warrant of execution against the consumer’s property

A sheriff will be sent to the consumer’s house to list all the goods that they own (for example, furniture, kitchen equipment, motor car, etc). These goods, up to the amount owed plus costs, will then be sold on auction unless the consumer has the money demanded, and can pay it all. The sheriff may not attach beds, bedding and clothes.

After the items are sold, and the sheriff is paid, the balance is sent to the creditor. If the sale does not provide enough to cover the debt, and the consumer owns a home, this can also then be sold in execution. If there is a balance still owing after the sale, the creditor can ask the court for an emolument (salary) attachment order as well.

An emoluments (salary) attachment order

This is one of the most common ways that a debt is collected from the consumer after judgment is granted. Here the court orders the consumer’s employer to deduct the debt in specified instalments from the consumer’s salary. It is sometimes incorrectly called a garnishee order. It is also unlawful for the employer to refuse to deduct the money because the instruction comes from the court.
A garnishee order

Here the court orders someone (usually the bank) who owes money to the consumer, to pay the creditor instead of the consumer. So for example, if the consumer had R5000.00 savings in their bank account, and owed the creditor R3000.00, the court would order the Bank to pay the R3000.00 from the consumer’s bank account to the creditor.

The costs of repaying debts in terms of a judgment

It can cost a lot if an account is handed over to a legal collections department, especially for debt happening before the National Credit Act. Not only does the consumer have to pay the original debt, but they have to pay extra interest (it is taking them longer to repay, and interest is charged every day), extra charges to lawyers, to debt collectors, to sheriffs and even to the employer if they are involved in paying money to your creditors.

Before the National Credit Act, this meant that a small debt could end up being a huge burden. Even under the NCA, a consumer can pay much more than they signed the contract for.

Example of the costs and interest charged on a R4000 loan taken in May 2007 (in other words, before the NCA), where judgment was taken for R7 200 and where the court ordered interest at 15.5% per year, and a monthly deduction from an emolument attachment order of R600 per month.

Amount owing according to the judgment

R7 200.00

Interest at 15.5% over 18 months

R 809.21

Legal Costs – legal process –
Collection Commission  to attorneys (10% plus vat) R64.98 X 18

R800.00

R1 169.64

Employer’s deductions (5% of each instalment) = R30.00 x 18

R 540.00

TOTAL COSTS TO BE PAID

R3318.85 

TOTAL TO BE REPAID including amount owingl

R10 518.85 (18 x R600.00 per month)

Some attorneys will charge more than the above, others charge additional costs forevery telephone call and letter on the file. This can also add up to a lot exra (beware that you are not overcharged by the lawyers – this can happen!)

Note also that
*if the interest rate was higher e.g. 22% or30%, you would end up payingmuch more in interest andother costs and for a longertime.
* if the monthly instalment that you pay is a small amount, the interest will also be higher as interest is charged on the balance at any point in time

When a warrant of execution is issued, most often the sheriff's auction will result in the goods being sold for much less than they are worth and after the sheriff takes his fees, the consumer could still end up owing quite a lot of money AND be without the furniture and other items sold.

So it is in the consumer’s interest to contact the creditor or lawyer as soon as they receive notice of anything and make arrangements to pay.

Consumer rights and remedies in the legal process

There are many stories about consumers who have been badly treated by debt collectors who threaten them if they do not pay, about deductions from salaries which leave a consumer with no money to live on, and sheriffs selling goods yet consumers still having to pay most of the debt. Below we provide you with some general guidelines and tell you what remedies consumers have in these and other situations.

General guidelines for consumers

If a consumer owes money, they should always make some payment, however small and as much as they can. Never pay nothing. The more you pay the less interest you will pay in the long run.

Do not have the attitude that the balance is wrong so I won't pay anything. If you owe money you will be charged interest every day until the debt is settled in full.

Never sign any documents in blank. If a consumer is asked to sign a section 57 or 58, make sure that all the information is filled in, including amount due, interest rate to be charged, amount of the monthly instalment, when they must start paying and how.

Never sign a document that you do not agree with. What a person signs is binding and will have consequences. Always get a copy of the document signed as this is proof of the contract and helps the consumer to know what their obligations are.

Complain if there is a problem and get help if you cannot negotiate yourself.

Contact the credit provider and lawyer before they take any legal action (because of the costs) and always keep a record of who you spoke to, what time and what was discussed. Most important, record what was said in writing and send a letter or email to them (keep proof of this as you may need it in the future to solve the case).

Defences – prescription and in duplum

Consumers have two defences in common law that they can use if relevant.

Prescription

If the last time that a consumer paid any money on the account is more than 3 years ago, and they have not admitted that they owe the money, the consumer can claim that the debt has prescribed. This means that the creditor has the right to ask for the money, but the consumer can raise the defence of prescription and refuse to pay the remaining balance on the debt.

So if a consumer receives a call or a letter on an old debt, always ask for a full statement to see when the last payment was made. Also ensure that the consumer does not pay any money until you have investigated if prescription applies – if they pay even R50.00, prescription will be “interrupted” and another 3 years will pass before the claim prescribes.

Note: Prescription does not apply if judgment has been taken for the debt.

If a claim has prescribed, the negative listing must be removed from the credit bureau records in terms of the National Credit Act.

In duplum

If the interest on an account is more than the amount owing at the time that the consumer defaults, s/he can claim that some interest must be written off in  terms of the in-duplum principle that the interest may not be more than double the outstanding amount charged at the time of default.

So if a consumer takes a loan of R5,000 and defaults when the balance is R4,000.00, then the balance on this account may never be more than R8000.00 (double R4,000.00).  Under the common law (which applies to credit before the National Credit Act,  ie before 1 June 2007), interest can continue to be charged on the account so long as the balance never goes above R8000.00.

When a judgment is taken, in duplum starts to be calculated again. For example, if judgment was taken at R7200.00 the balance may accumulate again until the consumer defaults, and then the in duplum rule will mean double the balance at the time of this new default.

The common law in duplum was not much help to consumers but you should look out for a balance which is over the in duplum maximum amount, so you can at least help to get the balance reduced.

Under the National Credit Act, the in duplum principle has been made part of the Act, and the new in duplum is much stricter. Now when a consumer defaults, the consumer may not be charged more than double the balance at the time of the default. For example, if the balance is R4000.00 at the time of default, the consumer only needs to pay R8000 more (this includes for interest, legal fees, insurance and any other charges). This is a big help in reducing the final amount that the consumer must repay, and it applies even if judgment has been taken.

IMPORTANT: When you are helping a consumer with an account, always ask for a full statement form the beginning and check for in duplum and prescription.

Debt collector’s rules

Debt collectors may be used by credit providers to recover debts from consumers. Debt collectors are regulated by the Debt Collector’s Act (No 114 of 1998) whichprovides for the exercise of control over debt collectors and legalizes the recovery of fees or remuneration by registered debt collectors. The overall goal of the Act is to monitor the conduct and professionalism of debt collectors and promote a culture of good governance within the profession. This will contribute to protecting consumers as well as creditors. The Council for Debt Collectors exercises control over debt collectors.

If a debt collector charges for his/her services, they must be registered with the Debt Collectors Council and they are not allowed to:

  • Use force or threaten to use force against the consumer or their family
  • Physically threaten the consumer or their family
  • Give, or threaten to give information to the consumer’s employer that may affect their opportunities as an employee
  • Serve any false legal documents
  • Present themselves as police officers, sheriffs or officers of the court
  • Spread, or threaten to spread any false information about the consumer’s credit worthiness
  • Charge more than the tariff of fees which is set down by the Council

Debt collectors are allowed to charge for letters and notices that they send out to people. These costs usually have to be paid for by the debtor (person who owes the money). Debt-collectors are not allowed to issue a summons- this can only be issued by a court. .

Admission of Liability

In order to get a consumer to pay his or her debt, a debt-collector may get the consumer to sign a form, called an Admission of Liability. If the consumer signs this form, it means they agree that the money is now owed to the debt-collecting agency and NOT to the creditor.

By signing this form the consumer also agrees to pay all the extra administrative charges of the debt-collecting agency. The original amount that was owed to the creditor will now increase because of these add-on charges.

If the consumer signs this form and then refuses to pay the agency, the debt-collector can refer the debt to their lawyers. The consumer will then have to pay to the lawyers the original debt, the debt-collector's fee and the lawyer's costs. The consequences of signing such a form are therefore very serious.

If a consumer is finding it difficult to repay the debt, it is preferable for them to contact a debt counsellor who will work with the consumer and the credit provider to try and reach an agreement on how the debt should be repaid. This gives the consumeran opportunity to pay back the money through an agreed legal process, rather than wait until there are more serious consequences - like being called to court or having their goods repossessed.

See Debt counselling.

The Debt Collector’s Act

The following are important provisions in the Debt Collector’s Act:

  • Establishment of a Council for Debt Collectors which is responsible for monitoring debt collectors and their work.
  • Registration as a debt-collector – No one, except for a lawyer, can act as a debt-collector unless they are registered as a debt collector under the Act. There is a prescribed code of conduct for debt collectors that is published in the government gazette.
  • Complaints against debt-collectors can be referred to the Council who can withdraw a debt collector’s registration if they are found guilty of improper conduct. An application can also be made to the court to deregister a debt-collector if they don’t comply with the Act.
  • Debt-collectors are only allowed to collect the following:
    • The amount of the original debt that wasn’t paid, plus interest based on interest rates that are legal, for the period during which the debt wasn’t paid.;
    • Necessary expenses and fees that are prescribed by the Minister in the Government gazette;
  • A debt-collector must open a separate trust account at a bank and any money deposited into this account must be dealt with according to specific procedures in section 20 of the Act.
  • So if you are unhappy with the way that a debt collector has handled a matter, or if you believe that they are charging too much, complain to the Council for Debt Collectors on 012 804 9808/8483.

Complaints about a debt collector, for example, about the way they have handled a matter or about their charges, can be made to the Council for Debt Collectors on 012 804 9808/8483.

For more information on the Council for Debt Collectors and a list of registered debt-collectors, go their website: www.debtcol-council.co.za.

When and how to have a judgement rescinded

A consumer can apply to court to have a judgment rescinded (set aside), either if it was granted in error or if the debt has been settled.

The court will only rescind a judgment in error if:

  • The judgment was given without the consumer being present at court (i.e. the  judgement was by default), and
  • The consumer applies for the rescission within twenty (20) days after they become aware that the judgment was taken, and
  • they want to defend the claim and can set out in an affidavit why they did not defend the case originally and what their defence against the claim is.

If the consumer has settled their debt, the application to court must include a letter from the creditor confirming that the debt is settled and they have no objection to the consumer having the judgment rescinded.

Usually applications to court are done by an attorney. If the consumer wants to save on these costs, they can also do it by themselves.

Applying to court to have an emolument (salary) attachment order rescinded or amended

Emolument (salary/wages) attachment orders are sometimes obtained unlawfully, for example, if the consumer signed an agreement to have this deduction from his/her salary at the same time as they applied for the loan. The court order can also be unfair if the consumer cannot afford the instalment.

The consumer can then apply to Court to have the order set aside or amended (changed). The application will need to have a covering document called a Notice of Motion where the consumer states what they want, and they will need to submit an affidavit. This will set out the details of their case. If the consumer cannot afford the payments, they must state what they can afford to pay each month and must give full details of their income and expenses with proof attached (for example, account statements, rent receipts, salary advice). The court will then look at this and decide if the consumer’s offer is reasonable.

It is in the consumer’s interest to pay as much as possible as the less the instalment is, the more the consumer will pay in interest.

Applying to court to stop the sale of your goods

If a Sheriff appears at the consumer’s home after judgment and attaches their moveable property in order to sell it on auction, the consumer can apply to Court to have the sale in execution suspended.

The court will only order this if the consumer can prove that they can afford to pay reasonable regular instalments and/or agree to an emolument attachment order being made against their salary. Again, the consumer will need to make these regular payments or the order will be reinstated and the goods will then be sold.

If the attachment is unlawful or incorrect, the consumer can also apply to have the order rescinded.

Attorney’s fees and charges

There are many complaints from consumers that attorney’s fees are very high and they do not know how to check what they can charge or how to challenge them.

Attorneys can also only charge fees according to the tariff set down in the Magistrate's Court Rules. There are two tariffs for the magistrate's court: a standard tariff and a higher tariff which only applies if the consumer agrees.

When the consumer signs a contract, there will usually be a clause which says that if the consumer defaults, the matter will be handed over to attorneys and the consumer will have to pay the attorney's fees “on an attorney and client” scale. This allows the attorney to charge for more items but the amount that they charge is still controlled.

If you think that the consumer may be overcharged, ask for a full breakdown of costs statement and if you are not happy ask for the Bill to be taxed at court (negotiate as the consumer may have to pay for this).

It is difficult for a consumer to act on his/her own when challenging the legal fees because this requires expert knowledge. You can report the matter to the Law Society which is a society for lawyers in the different provinces, but they are not as independent as the ombuds offices are – the best thing is to find a free counselor or advice office or law clinic to take on the case.

Remember that with the new in duplum principle of the National Credit Act, on credit granted from 1 June 2007, legal fees are now included in the calculations so they are even more controlled than before.

Being under administration

One of the major problems with debt is that there are many people who advertise and offer consumers a way to get out of debt, but these remedies often mean that the consumer pays for these services and ends up with more debt than before.

Many consumers pay an administrator an amount each month so that s/he can distribute the money to different creditors and this can add to the debt.
Administrators charge for their services, usually more than R1000.00 to get the court order. They also take at least 12.5% of each instalment that is paid for their fees.

Usually the instalment that the consumer pays is much less than the total instalments they were required to pay on the debts combined, so each creditor receives much less than the original agreed instalment. However the consumer continues to pay interest on each account, and the administrator only distributes money once every three months, so often the balance on the debts may even go up instead of down because the creditor is receiving less than the interest that is being charged.

Some administrators also do not pay over on time, others do not paid over the money received at all.

Administrators are supposed to prepare distribution accounts every quarter, but most often consumers do not receive copies, so they do not know what the charges are, or how much each creditor is receiving. One case study showed that a consumer had to pay R49 050 on a debt that would have been R15 807 if the consumer had not paid the debt through the administrator.

If consumer is in a situation where they have relied on one of these for-profit debt intermediators, as a paralegal you should ask for all the distribution accounts, contact the creditors to see if the consumer can make arrangements to pay them directly, and then go to court to have the administration order rescinded. If necessary contact a consumer advice office or not-for-profit debt counselor for help.

Using a debt counsellor

The National Credit Act encourages consumers who are “over-indebted” to approach a debt counselor or dispute resolution agent for help in developing a repayment plan for all debts to be repaid within a reasonable period of time.

Consumers can also approach a creditor for help in developing such an arrangement on an informal basis, or the court may refer the consumer to a debt counselor if the consumer appears in relation to a single debt.

When you are deciding who to refer the consumer to, it is important that the person whom the consumer approaches, has a good reputation, tells the consumer upfront what they charge, and that the charges are reasonable. You may find some NGOs who do not charge or charge very little and are committed to helping consumers. There are also creditors who are looking to help their clients in a similar way and will not charge for their services.

With debt counselors the process is formal and is set out in the National Credit Act.

The consumer will complete forms which will include details and proof of all their debts, as well as their income and other expenses. They will look at whether any of the debts were granted “recklessly”, for example, if at the time that the consumer applied for credit, whether the creditor properly assessed that the consumer could afford to repay the loan (the court can order a remedy if the loan was granted recklessly but the consumer would have to have given full disclosure of all their debts and expenses or else no remedy is available). The counselor will work out a plan as to how the debts will be settled and what the monthly repayment will be. If the repayment plan is accepted, it is made an order of court. If the creditors do not accept the proposed plan, they can oppose the plan and the court will then decide whether to grant the order or not. Once the order is granted, the consumer’s monthly payments are paid either directly by the consumer to the creditors or most often, to a payment distribution agency who also charges for their services, and who distributes the portions to the creditors. The arrangement will be listed on the credit bureaus and the consumer will not be allowed to take further credit until they have paid off their debts.

If you need a debt counsellor or if you have a debt counselor that you are not happy with and need to complain about, contact the National Debt Mediator’s Association on 0861116362 or email: info@ndma.org.za ; or the National Credit Regulator on 0860 627 627 or 0860 NCR NCR.

Handing back (surrendering) goods bought on credit

The National Credit Act also provides extra protection for consumers who have purchased goods on credit, and default on paying their instalments or who want to cancel the agreement.

For consumers with credit agreements signed from 1 June 2007, consumers can now return the goods to the credit provider within 5 days after they have given written notice that they are cancelling the agreement. The credit provider must then give the consumer a written estimate of the value of the goods. They can then either keep the goods and continue with the contract or allow the creditor to sell the goods for the best possible price. Once the goods are sold the credit provider must give the consumer written notice with details of the sale and any amount that they may owe if there is a shortfall. This shortfall must be paid or the creditor can obtain a judgment against the consumer for the balance outstanding.

If the consumer is unhappy about the sale, they should approach the creditor or get the help of a mediator or approach the Provincial Consumer Court.

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