Unscrupulous creditors are trading on ignorance.
A South African multinational company's decision to bring in a law firm to assist more than 13 000 staff members who had garnishee orders against them has opened a can of worms, revealing a seriously dysfunctional system in which widespread abuse was taking place.
Garnishee orders are court orders requiring the employer of a person in debt to pay part of their wages, with interest, directly to the lender.
The research by law firm Edward Nathan Sonnenbergs (ENS), supported by companies that administer garnishee orders on behalf of employers provides for a horrifying case study of the wider garnishee system. It found that more than half of the orders against staff members were invalid or irregular, and that 39% of the deductions were being made against loans that had been paid or did not exist.
Research by Summit Garnishee Solutions found that a high percentage of garnishee orders had employed at least one irregular practice, which ranged from charging a consumer for issuing a balance statement to fraud.
Problems begin at the point of purchase when consumers are forced by credit providers to sign forms allowing for a judgment against them if they default, limiting their right to challenge cost orders later.
This is followed by a lack of oversight at court level, where overtaxed or inexperienced clerks often fail to pick up documents that do not have cost amounts or supporting documents attached, or are being issued in the wrong jurisdiction. Therefore inflated costs by law firms or collection agencies are not stopped.
Intimidated
Once they are received by the employers, inexperienced or overworked staff at companies, often intimidated by receiving a legal document, accept the orders without challenging the content or taking into account how many garnishee orders are already in place against an employee. Duplicate orders for the same debt were often not picked up, and neither was missing costs, which meant staff members were often paying debts long after they had been cleared.
Until companies began outsourcing the administration of garnishee orders, many of the irregularities remained undetected by employers or employees and the full extent of the problem, such as that uncovered by ENS, was not known.
The impact of widespread indebtedness and the resulting desperation cannot be underestimated. It is believed that high levels of debt linked to loans have contributed to the bloody clashes between miners and the police in Marikana.
The council of the Law Society of the Northern Provinces was so concerned about the findings of systemic abuse that it planned to meet on Friday to discuss ENS's finding. Tinus Grobler, director of the law society, said: "We are very concerned about the problems revealed in the practice of issuing garnishee orders by the ENS investigation."
He said the society had received complaints about one or two law firms and were investigating a "major complaint against a team of attorneys" about the issuing of garnishee orders.
The government is also scrutinising the present system. Officials said discussions about regulations to curb unsecured lending and regulate the garnishee order system were being were being held by the treasury and Reserve Bank because of concerns about the high level of indebtedness.
A month ago the treasury and the Banking Association of South Africa signing an agreement to halt the issuing of garnishee orders and to support action being taken against credit providers who issue pre-signed garnishee orders.
Orders in circulation
There is no reliable data on the amount of money tied up in garnishee orders but Kem Westdyk of Summit Garnishee Solutions said its work with a mining house with 50 000 employees and a government department with more than 80 000 employees, saved those employees R3-million in the first year.
Statistics released at a debt summit earlier this year show that there are about three million garnishee orders in circulation affecting between 10% and 15% of employees.
Peter Allwright, ENS senior forensics manager, said: "The concern is that people who earn the least, and therefore have the highest risk profile, are being nailed left right and centre through loans and much higher interest rates by people who are misusing or abusing the system."
Defaulters are also left with an impaired credit record.
The National Credit Regulator's latest data, released in September, showed that 19.6-million consumers made use of credit and the number of consumers seen as a good risk declined by 0.6% in the quarter and was 0.3% year on year. Meanwhile, the value of credit granted increased 10.04% in the quarter March to June 2012, while unsecured credit increased 36.12% compared to the same period a year before.
A review of public sector indebtedness conducted five years ago showed that garnishee orders to the value of R1.01-billion had been issued to government staff in the 2006-2007 financial year.
The National Debt Mediation Association said it received 37 500 debt applications amounting to more than R10-billion in the period February 2011 to October 2012.
Legislative change
The review by ENS provides a comprehensive case study, involving 42 000 staff members from different income brackets and different provinces working for the same company.
Of concern is that little has changed since a 2008 study by the University of Pretoria law clinic, The Incidence of and the Undesirable Practices Relating to Garnishee Orders in South Africa. It found "irregularities in the obtaining, serving and applying of emoluments (referred to as garnishee) orders and thus exploitation of debtors abounds".
The study, which highlighted several case studies and made a number of recommendations for legislative change, remains valid today, according to Charlotte van Sittert of the law clinic.
The research indicated that the main roleplayers using garnishee orders were microlenders, followed by banks and then retailers.
High interest rates and add-on fees were seen as major contributing factors to keeping customers in a debt cycle, according to Westdyk.
He said they had found in one case that an employee had made 38 payments, in full and on time, and an attorney had charged eight attendance fees of R100 each – the borrowed amount was R3 000 and the total legal fees R9 000, for a loan paid in full.
Unnecessary
"We have hundreds of examples of where debt of R500 became debt of R5 000, 90% of it due to legal fees. All of these fees were for attendances that were at worst illegal and at best unnecessary, or for fees for "calculating the balance", "receiving payments" and "reading the bank statement".
Allwright said, in the case of the multinational they assisted, 10% of orders were charging monthly interest that was less than the interest rate, meaning that consumers would never pay off their debt.
"In some cases, companies had advanced loans to staff members who are paying their full salary to creditors, which further exacerbates the problem," said Allwright.
The law clinic found cases of falsified legal documentation forwarded to employees, and allegations that court clerks had accepted bribes from credit providers or companies to ensure the orders were issued.
Westdyk said his company had also uncovered a "sizeable" legal company where staff were stamping their own court documents and assigning fake file numbers.
Intimidated
It appears that a handful of companies have been identified as possibly making use of illegal means to obtain money. But many of the fees charged are allowed in terms of existing legislation.
Westdyk said the problems in the garnishee system had been allowed to escalate because of a lack of oversight by regulators. "There is the Law Society of South Africa, the National Credit Regulator and the like, and we are yet to see their teeth."
He said employers were also not rejecting flawed orders when they were delivered.
This, according to Allwright, was because their staff did not understand what was required for an order or they were intimidated by the amount of protection offered to creditors. Creditors can attach furniture and goods at a company if that employer fails to execute the order.
"The rules need to be sharpened and attorneys and collection agencies need to be forced to play by the rules in order to curb irregularities and corruption," he said.
Common problems that debtors face
- A lack of knowledge among court clerks about the procedure relating to garnishee orders, resulting in orders being approved that should be rejected at the start. Problems included orders with no costs stipulated, incorrect jurisdictions and a lack of supporting documentation or sufficient identification;
- The orders were seldom checked by overtaxed magistrates, who in some cases have hundreds of orders to approve daily, and stamp documents without studying the orders;
- Lack of knowledge among consumers about the effect of interest on their loans, and creditors compelling consumers to sign blank or undated enforcement documents;
- A lack of knowledge among employers to detect irregularities;
- Illegal loan agreements and interest rates, with companies still lending money at 30% interest a month, when an accepted maximum is 5%; and
- Debtors signing forms on the same day of signing the loan agreement, consenting to a judgment should they default, despite this being illegal. This robs the debtor of the right to fight the amount being charged and ensures it is seen only by the clerk of the court, as a magistrate need not be involved.
Other issues involve:
- The overcharging of contingency fees of 25% by lawyers, which were added to the capital amount where it gathered interest;
- Recovery outsourced to different agencies that obtain separate orders for the same debt;
- No statutory cap on the amount to be attached, except for government employees where it is required that 40% of the salary be retained;
- The cost is not outlined so employees would have to continue paying the debt until they died. In the study by law firm Edward Nathan Sonnenbergs (ENS), 16% of the orders did not have a balance listed; and
- No limit on the number of garnishee orders that can be issued to one consumer.
ENS senior forensics manager Peter Allwright points out that there are Acts governing the issuing of garnishee orders, including the Magistrates' Courts Act and the National Credit Act, but they are not being followed or enforced.
"Once a person has an order against them, they are unable to apply for debt review or debt relief, although they can go to court and argue that the amount is higher than they can afford to pay."
The bulk of garnishee orders were not for large-ticket items, such as appliances or furniture, but for day-to-day expenses like food or school fees. – Chantelle Benjamin
Fees that lawyers can legally charge
The attorney may recover 10% collection commission on every instalment paid towards the capital and cost of an action, with a maximum amount of R300 per instalment. Over R400 can be added for the emolument attachment order, obtaining a certified copy of a judgment, correspondence and attendances, which could involve charging to review an Act. Also included is a maximum fee of R143 for tracing the judgment debtor and sheriff fees of up to R40 every time he/she hands over the documents.