A landmark ruling by the High Court has found against the excessive over-charging of debt collection fees on garnishee orders.

The judgment will not only have a significant impact on the amount lawyers may charge for legal fees on outstanding debt, but could result in 1 million garnishee orders being removed and around R1 billion in excessive debt collection fees repaid.

In a fight against the abuse of garnishee orders, Summit Financial Services, the Stellenbosch Law Clinic and 10 of their clients brought a high-court application against the excessive over-charging of debt collection fees on emolument attachment orders, commonly known as garnishee orders.

Once a judgment has been granted against a consumer, the cost of that debt can escalate rapidly. In a real-life example, a judgment was brought against an individual who had borrowed R1 500. The final judgment amount, which is to be collected via an emolument attachment order, was R11 689 which is six times the original loan amount.

This final judgment amount was made up of R1 500 interest, R7 411 of attorney fees, a collection commission of R1 140 as well as ‘expenses’ and a ‘certificate fee’.

Summit has estimated that more than R1 billion has been illegally deducted from thousands of distressed debtors by unscrupulous credit providers and collection agents who add collection costs, including legal fees, to debtors’ accounts after judgments that amount to three or four ‒ sometimes as much as 10 times ‒ the original debt.

In their application to the High Court, Summit argued that section 103(5) of the National Credit Act, which includes collection fees in the calculation of the in duplum rule, should also apply to debts post judgment. In duplum caps the maximum interest/fees that can be added to a loan at the same value as the principle debt/original loan. In many cases the debt repayments via garnishee orders would already have met the capped amount, and Gardner believes this means around 80% of garnishee orders ‒ around 1 million ‒ would be stopped.

It was the view of the National Credit Regulator, credit providers and attorneys that section 103 (5) does not apply to debt post judgment, as it is no longer a credit agreement but a judgment order. This means that not only can the interest bill double, but additional attorney fees can push the debt well past four times the original loan amount.

Forever indebted

Clark Gardner, CEO of Summit Financial Partners, argued that this interpretation of the Act, combined with excessive legal fees, meant that the consumer remains forever indebted.

In their application, Summit argued that as there appears to be very little oversight of these fees, some attorneys create ongoing annuity income which they collect from garnishee orders.

“Costs are added unabated against a consumer’s account without consideration as to whether the costs were reasonably incurred, whether the costs were reasonable, or whether the costs were actually incurred,” says Gardner.

In his ruling, Judge Hack agreed on all points, including the argument that “while the credit providers are able to recover their debts without limitations on legal costs and procedures, they will continue to extend credit to the vulnerable without the necessary care and caution.”

The judge also commented: “I take judicial notice of the notorious fact that consumers are constantly being cajoled and encouraged to apply for credit. This occurs not only by adversting but particularly by the use of mobile phone technology.”

In summary, the judge ruled that:

• All collection costs under Section 101 (1) (g) and Section 103 (5) of the National Credit Act are to include legal fees and apply to the credit agreement charged before, during and after litigation.
• Section 103 (5) applies for as long as the consumer remains under default irrespective of whether or not judgment is granted. This effectively means that legal and collection fees on emolument attachment orders will be capped under the in duplum rule.

Furthermore, the judge ordered that all legal fees may not be charged to the consumer unless they have been agreed to by the consumer or have been “taxed” which means audited.

The judge ordered that an expert chartered accountant be appointed to recalculate the outstanding amounts owing on the emolument attachment orders of the ten applicants. Any overpayment must be refunded within seven days of the calculation being finalised. This sets precedent for individuals currently under garnishee orders to request a recalculation of the loans they have repaid so far.

How can consumers get recourse?

Unfortunately, while this ruling has the potential to be a real game-changer for debt-stressed consumers, Bayport, one of the defendants, has lodged an appeal against the judgment.

According to the Credit Ombudsman, this would mean that the effect of the decision is suspended pending the outcome of the application.

However, Gardner recommends that affected consumers should still refer this to the NCR or Banking Ombudsman as the judgment was not new law but clarifying existing law.

“They can appeal but the law stands. If they now lodge their complaints they possibly have more rights to earn interest on the refund due as well as defend legal collection actions.”

He also recommends that individuals with garnishee orders ask their employers for a breakdown of their garnishee deductions to check if they qualify for a refund.

This article first appeared in City Press.