What legal costs can a creditor charge a debtor to recover outstanding debt?

08 February 2022 417
When times are tough, you may not get around to paying all your bills. But be warned, if neglected for too long, it will inevitably lead to letters of demand for payment along with interest, charges and legal fees. As your outstanding obligations grow, you may wonder whether all these costs are allowed? Lets unpack what the law says.

To answer your question we must turn to the National Credit Act 34 of 2005 (“NCA”). The NCA allows the person that is owed money (the creditor) to, in terms of a credit agreement, levy additional amounts over and above the amount that is owed, such as interest, fees, collection costs and charges against the debtor should the debtor not pay his debt in accordance with the credit agreement. Collection costs are defined as an amount that may be charged by a credit provider in respect of the enforcement of a consumer’s monetary obligations under a credit agreement, but does not include a default administration charge.

The NCA prescribes the conditions under which a creditor can levy collection costs levelling the playing field and ensuring that a creditor doesn’t have an open chequebook to charge the debtor ridiculous collection costs.

The NCA stipulates that the aggregate interest, fees and charges, including collection costs referred to in section 101(1), which accrue during the time that the consumer is in default, may not exceed the unpaid balance of the principal debt at the time of the default. For example if R2000 is owed, then the total costs that can be levied can’t be more than R2000.

Our Supreme Court of Appeal (“SCA”) recently reviewed the NCA’s stipulations to decide whether the allowed collection costs included the legal costs a creditor had incurred prior to the commencement of litigation or post the commencement of litigation, but before judgment, as well as the costs incurred after judgment is obtained.

The SCA confirmed that there is a distinction between the collection costs as provided for in the NCA, and legal fees, and that the legal fees a creditor incurs to enforce payment of a debt under a credit agreement doesn’t form part of the NCA’s definition of collection costs. The SCA also confirmed that the restriction the NCA placed on the total amount of collection costs a creditor can levy against a debtor did not apply after judgment was obtained against the debtor. This means that a debtor will be liable to pay the debt owing as well as the collection costs (although limited as indicated above) and legal fees the creditor incurred in instructing an attorney to recover the debt by obtaining judgment against a debtor.

Bear in mind that our law does prescribe the maximum tariffs that an attorney may charge to collect debt and obtain judgment, and that such legal fees can also be taxed by the Taxing Master or Clerk of the Court. This ensures that legal fees don’t get out of hand.

What the SCA judgment means for you as debtor though, is that collection costs as well as legal fees will be due and payable if you default on your payment. If you find yourself in this position, our advice to you is to make timeous arrangements for payment or payment holidays with your creditors and/or approach a debt counsellor to discuss the option of debt relief.