Debt collection for beginners
Provided by Schindlers Attorneys
27 Oct 2020
Taking legal action: initiating process
Recovering outstanding amounts can be done effectively through various debt collection mechanisms.
Drafting and dispatching a letter of demand has become a prerequisite to any debt collection proceeding. A letter of demand not only sets out the basis of the creditor’s claim but also creates an opportunity for the matter to be resolved amicably. Furthermore, in some instances, a letter of demand serves to complete the cause of action before any proceedings can be instituted in Court.
Prior to drafting a letter of demand, one will need to consider whether the National Credit Act 34 of 2005 (“NCA”) is applicable. The NCA is applicable to all credit agreements within the Republic, however there are certain exceptions to this, as set out in section 4 of the Act. That being said, should the NCA in fact be applicable, a creditor must observe sections 129, read together with 130, in order to validly pursue any and all amounts owed to him/her. These sections place an obligation on a creditor to first notify the defaulting party/ debtor, in writing, that the credit agreement will be referred to a debt counsellor, alternative dispute resolution agent, consumer Court or ombud with jurisdiction with the objective of resolving the default and/or to negotiate a payment plan in order to bring the arrear payments up to date. Failure to notify the debtor of any intentions to recover outstanding amounts, in the prescribed form, may in some instances nullify any further action taken by the creditor.
When to issue a summons?
If a debtor fails to settle the amount(s) due, owing and payable to the creditor, as set out in a letter of demand, the creditor can proceed to institute legal proceeding against the debtor.
Prior to instituting legal proceedings, one must consider prescription. The Prescription Act 68 of 1969 provides that contractual and delictual debts expire after 3 years from the date when they initially became due, owing and payable. This is of course provided that the debt is not secured by a mortgage bond, or some other kind of security, which might extend the prescription period up to 30 years.
Should the debtor acknowledge the outstanding debt or make payment towards it, within the 3-year period, prescription is interrupted and the debt remains valid and enforceable. In addition to this, prescription can be interrupted by service, on the debtor, of any legal “process” wherein the creditor claims payment of the debt.
In the event that an overdue amount prescribes the creditor can no longer claim this amount from the debtor. Accordingly, should the creditor fail to institute legal proceeding timeously he/she will no longer have a right to enforce his/her claim against the debtor.
Where a matter is undefended
Generally, the intervening legal “process” in debt collection proceedings is a summons, that serves to notify the debtor of the creditor’s claim against him/her. Procedurally, this process must be served on the debtor, at his/her nominated address (domicilium citandi et executandi) or registered address, by the Sheriff of the Court. Thereafter, the debtor will have 10 court days within which, from service of the summons, to serve and file a notice of intention to defend.
A matter will be deemed “undefended” in the event that the debtor fails to serve a notice of intention to defend (or a plea, where a notice to defend has been served) within the prescribed time period.
Default judgment: how & when?
Any default judgment granted is binding and designed to swiftly bring court proceedings to their conclusion. Default judgment is essentially granted without hearing the version of events of the party against whom judgment is granted, and may be taken on the following grounds:
- When the defendant fails to give notice of an intention to defend;
- When the defendant fails to deliver a plea within the prescribed time period and after service of a notice of bar;
- When the plaintiff does not deliver a declaration or is barred from doing so; and
- When the plaintiff or defendant fails to appear at trial
Much like an application, a request for default judgment is generally considered on the papers before the Court, clerk or registrar. Notwithstanding the above, It must be noted that if a creditor applies for default judgment (where judgment is pending), and the debtor subsequently serves his/her notice of intention to defend, even if such notice is served outside the prescribed time frame, the ordinary course of litigation is to then proceed.
Where a matter is defended
Should the debtor serve and file a notice of intention to defend, within the requisite 10 day period, the matter will be regarded as defended. Thereafter, the debtor will have an opportunity to set out the grounds upon which he/she wishes to defend the claim brought against him/her, by way of a plea and counterclaim. This process can, however, be interrupted through an application for summary judgment (if successful).
Summary judgment: how & when?
Like default judgment, summary judgment is designed to give the applicant speedy judgment, without the delay and expense of trial. The procedure for summary judgment in the Magistrates’ and High Courts are essentially the same, however the stage at which such application may be made differs. In the Magistrates’ Court, application can be made after receipt of the debtor’s notice of intention to defend, while in the High Court, application can only be made after receipt of the debtor’s plea and counterclaim.
When making application to Court, for summary judgment, the creditor must show that the debtor has no bona fide defence and has merely defended the action in order to delay the resolution of the dispute.
Enforcement of judgment debt
Obtaining judgment is not necessarily the last step in the debt collection process. There are often instances where the debtor does not willingly comply with the judgment (settle the judgment debt). Accordingly, the judgment debt may be enforced through the execution of the debtor’s property. This process, generally, entails the attachment of the debtor’s moveable, immovable or incorporeal property, which is ordinarily sold on public auction in order to realise sufficient funds to settle the judgment debt. Execution can only be carried out once judgment has been granted and by way of a Court issued writ or warrant of execution.
This process can at times be lengthy, however, the creditor is generally entitled to realise as much of the debtor’s property as is necessary to extinguish the outstanding amount and associated judgment costs.
Writ or Warrant of execution
A writ or warrant of execution essentially instructs the Sheriff of the Court to attach and sell, property owned by the debtor, in order to satisfy the judgment debt amount.
Generally, a writ or warrant of execution can only be executed after the debtor has been made aware of the judgment granted against him/her and fails to timeously observe the terms of such judgment (conditions of repayment).
There are various challenges when executing a writ or warrant of execution, which are briefly set out below:
- Where the Sheriff is unable to gain access to the property or find sufficient property to attachment (nulla bona return of service);
- The value of the attached property is insufficient to satisfy judgment debt; and/or
- The property attached by the sheriff is owned by a third party.
Once the writ or warrant of execution has been successfully executed the attached property will be sold on public auction. In order for the Sheriff
to hold the public auction, certain procedural steps must be observed, the most important of which is that the auction must be advertised in the prescribed form.
As is the case with any auction, the anticipated price that an item will be sold for cannot be guaranteed. In light of this, it is important that the Sheriff attach sufficient property to satisfy the whole judgment debt. That being said, there are instances where a reserve price can be set to ensure that a specific amount is in fact realised at the auction.
Section 65A of the Magistrates’ Court Act 32 of 1944 (“MCA”) allows for the recovery of a debt after judgment has been granted. While this form of recourse is only available in the Magistrates’ Court, judgments obtained in the High Courts can be enforced through section 65M of the MCA.
Section 65A and 65M procedures apply where a judgment has been granted for payment of an amount of money or where the Court has ordered payment in instalments of such amount and the judgment has not been complied with within 10 days from the date on which judgment was granted or where the amount has become payable.
During these proceedings the Court will consider the financial position of the debtor and make a determination as to the settlement of the amount outstanding, based on the prevailing circumstances of the debtor. Failure to appear at a section 65 hearing is an offence and will lead to the issuing of a warrant of the arrest of the debtor.
In order to attach a portion of the debtor salary, in execution of the judgment debt, the creditor can approach the Court for an emolument attachment order. Should the creditor be successful in its application, the debtor’s employer will be ordered to attach, what is deemed to be a reasonable portion of the debtor’s salary and pay this amount to the creditor. These payments will be made on a continuous basis, and until such time as the judgement debt has been satisfied. Should the debtor’s employer fail to comply with such an order he/she will be held criminally liable.
Given the severe consequences of an emolument attachment order, the Court is required to employ judicial oversight prior to the granting of an order of this.
Where a creditor is unable to successfully recover the judgment debt, through the abovementioned avenues, he/she can approach the Court to have the debtor’s immovable property sold. Although this form of relief is generally granted as a last resort, there are cases where the Court will order the debtor’s immovable property be declared specially executed in the first instance, provided that such relief forms part of the creditor’s prayers.
In determining whether this form of relief ought to be granted, the Court will consider the value of the immovable property against the quantum of the judgment debt. Where ownership of the immovable property in question vests in the debtor, but a third party has a real right in respect of the said property, such as a mortgage held over the property by the bank, the property may still be executed. However, the any sale in execution of the encumbered property will be subject to specific conditions.
In addition to this, should the immovable property in question be the primary residence of the debtor, the Court has an obligation to exercise judicial oversight in respect of such application. Judicial oversight is crucial to alleviate the far-reaching and constitutional effects of executing a debtor’s primary residents. In exercising judicial oversight, the Court must give weight to all the relevant factors and compelling circumstances in relation to the execution so as to ensure that any order granted is just and equitable.
As is evident from the above, there are an array of mechanisms available to aid in the recovery of outstanding debt. While these legal tools are effective, when utilised correctly, pursuing any debt is a daunting experience. As such, we here at Schindlers Attorneys hope to assist in providing reliable and effective solutions should you ever encounter these challenges.
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