Debtors pay millions in illegal fees

Some debt administrators are profiteering from debtors' repayments by charging fees that far exceed the legal limits.

Illegal fees being discovered 

Debt administrators are deducting illegal fees that are conservatively estimated at R800 million from repayments made by over-indebted low-income earners. Low-income earners who are unable to keep up their debt repayments have in the past sought, and may in the future continue to seek, the help of debt administrators to reschedule their repayments to affordable levels.

But a Somerset West lawyer has found that most of these administrators are exploiting the people they are supposed to be helping and trapping them further in debt. Copies of distribution accounts that show how much of the money debt administrators collect from those under their administration was in fact paid to creditors, reveal that administrators are charging fees of about 23 percent to 50 percent of the amounts they collect.

The Magistrate's Court Act provides for administrators to take a maximum fee of only 12.5 percent of the amounts collected. Debt administrators are obliged to file distribution accounts quarterly with the magistrate's court that granted the debt administration order. But these accounts are not checked unless an affected debtor or creditor asks the court to review the administration order.

Lawyer finds debt administrators exploiting clients 

Somerset West lawyer Eduan Matthee has collected many of these accounts, which blatantly show fees are being deducted that far exceed the legal limits. Matthee, who has been taking on debt administrators that are over-charging since 1998, started his own debt administration company, Outadebt, more than two years ago.

He says debtors often do not see these liquidation accounts and are not sent any other statements. Thus they have no idea where they are in the cycle of repaying their debts. Outadebt has taken over the debt administration of more than 1 200 people who were being charged more than the 12.5 percent allowed.

Matthee says the average fees that were being deducted in the cases he has taken on were 30 percent. Abuse highlighted The abuse of debt administration orders was highlighted by a report by the Banking Council in 2002.

Prince Maluleke, the now Banking Association's general manager, says the report was sent to the Department of Trade and Industry. The Banking Council referred the abuse of debt administration orders to the South African Law Reform Commission.

The commission is preparing a report for Mini-ster of Justice Brigitte Mabandla that recommends repealing administration orders, Zolile Nqayi, the spokesperson for the Department of Justice, says.

He says although the Department of Justice recognises problems with these orders, it does not want to make piecemeal amendments to the Magistrate's Court Act, which was enacted in 1944, but would rather take "a holistic approach that addresses the whole old Act".

Nqayi says the courts do not have the capacity to check all the liquidation accounts that debt administrators file with them. Five years ago, the Banking Council commissioned independent auditors Deloitte, Ernst & Young, and KPMG to research 20 large debt administration companies.

The auditors found that the "costs, fees and other recoveries made by administrators from the payments made by debtors under administration substantially exceed legally permitted maximum limits and effectively allow administrators to be the major beneficiaries of the process at the expense of and to the severe prejudice of debtors and creditors alike".

In addition, the report found that while debt administrators were collecting money from debtors efficiently, distributions to creditors were "delayed for extended periods and substantially reduced by costs and fees way in excess of the legally permitted limits".

The council's report said that in most cases orders obtained from the courts on motivation by the administrators result in debtors making insufficient payments to their creditors - especially after the administrator has deducted its fees and costs - to settle the outstanding debts in a reasonable timeframe.

"This in effect condemns the affected debtors to remain under administration on a virtually indefinite basis …" The Banking Council's 2002 report said at that time some 650 000 people were under debt administration, and between 100 000 and 120 000 people were being placed under administration each year.

Based on those figures, Matthee says he believes more than a million people are currently under debt administration. He conservatively estimates that debt administrators are collecting an average repayment of R450 a month from people under administration. This means debt administrators could be collecting about R5.4 billion a year. The fees in excess of the legal limits that they are earning on the amounts they collect could average about 15 percent, or R810 million a year.

Nqayi says the Law Reform Commission does not know how much debt administrators are collecting. Legal precedents Debt administrators that charge more than the legal limits have been taken to the Supreme Court twice, but the legal precedents have failed to stop the widespread abuse.

Matthee represented Jim Broekhuysen in a case against a debt administrator, Melvyn Weiner, that went to the Supreme Court in 2001. Weiner was charging fees in excess of 12.5 percent on payments collected from a couple who were in dire financial straits. Broekhuysen had lent the couple money and was their largest creditor.

Weiner argued that in terms of Magistrate's Court Act he was entitled to charge a fee of 10 percent of the amount collected as a collection fee, over and above the 12.5 percent fee he was entitled to charge for debt administration. The Supreme Court held that this was not the case.

This was confirmed in another case against Weiner that went to the Supreme Court of Appeal in 2005 - African Bank versus Melvyn Weiner. This court said debt administrators can charge more than 12.5 percent of the amounts they collect only for costs that are separate and distinct from the administration of a person's debt. Matthee says this could, for example, be a one-off fee for an attorney if the debtor defaults or disappears.

Nqayi says the African Bank case resolved the dispute about how much administrators are allowed to charge. "There is no excuse for administrators who ignore this decision, as alleged," he says.

Matthee says all he has succeeded in doing by taking to court administrators who charge more than 12.5 percent of the amounts they collect is removing a single client from that administrator. The administrator is free to continue charging its other clients more than 12.5 percent of the amounts it collects and, although found unfit to be an administrator in one case, is appointed soon after as an administrator in another case, Matthee says.

He believes the bank accounts of debt administrators that charge more than the legal limits should be frozen and their businesses put under curatorship until new administrators can be appointed.