UNDERSTANDING THE DEBT COLLECTION PROCESS
The debt collection process involves several stages aimed at recovering outstanding debts owed by individuals or businesses.
As a critical aspect in the total spectrum of the financial system in South Africa, the process helps companies, trusts, body corporates and individuals to secure and maintain a healthy financial milieu. This process is governed by legislation and serves as a structured framework for both creditors and debtors.
In this article, we will provide an overview of the key stages involved in the debt collection process, as well as the standard approach taken by our firm to recover debts owed to our clients.
At EW Serfontein & Associates Inc (EWS), we believe in maintaining ethical and professional standards of the highest degree. Several of our team members specialise in the field of debt collection and are, therefore, well versed in the provision of sound legal advice where debt collection is concerned. Whether for individuals, large-scale businesses, SMEs or corporate entities, EWS has ample experience in handling these cases in an effective manner.
The debt collection process may be daunting for some, therefore we have taken the time to break break it down into the 4 key stages debt collection involves. These stages include the Demand, Summons, Judgment and Execution stages.
- Demand
This process typically begins with a letter of demand, which is a formal letter sent by the creditor (or their attorney) to the debtor, outlining the outstanding debt and requesting payment within a specified timeframe. The letter of demand serves as a final warning to the debtor, providing an opportunity to settle the debt before further legal action is pursued.
1.1 Arranging Payment
At EWS, we continuously pursue payment from the debtor at any stage of the collection process. With our client's approval, a favourable arrangement for payment is tabled to the debtor, or proposed by the debtor. After sending a letter of demand, a courtesy call is made to the debtor by one of our specialised staff members, explaining to the debtor that they have been handed over to our firm and that they should endeavour to make a payment of the outstanding debt as soon as possible (or within the specified timeframe communicated by the creditor) to avoid legal action and costs associated thereto.
As for most individuals and businesses in South Africa's current economic climate, keeping up with payments owed is becoming more and more challenging. It is in a debtor’s best interest to be upfront regarding what is, or what is not, feasible should their payments be delayed. Communication as to when the creditor can expect the total amount owed is of great importance, as well as sticking to agreed-upon time frames in order to settle the entire outstanding debt owed. The golden rule remains that any payment towards one’s debt is better than candidly absconding. Supreme effort must be made by a debtor to settle outstanding debts and avoid the possibility of severe, legal consequences.
As soon as the hand-over is communicated and explained to the debtor, and should payment in full still not be made, an arrangement with the debtor is tabled, based on our client’s instructions. This is met with an acknowledgement of debt.
1.2 Acknowledgement of Debt
An acknowledgement of debt sets out when the debtor is to make payment, and on what terms, this is favourable to both the creditor and debtor. On the one hand, the debtor can pay-off his credit in instalments, making the burden a bit less strenuous; on the other, it instruments the creditor to obtain monies due and owing to them with quicker recourse should the debtor default thereon.
- Summons
If the debtor fails to respond or settle the debt after receiving the letter of demand and courtesy discussions, the next step is to initiate legal proceedings by issuing a summons. A summons is a legal document issued by the Court, informing the debtor that they are being sued and specifying the amount owed.
The summons must be duly served on the debtor, where in most instances this will be to the debtor in person or at their domicile address by the specific Sheriff operating within the jurisdiction of the debtor. It is important to note that summons must be served within a specific time from when the debt arose, to avoid prescription (except for Sectional Titles – keep an eye out for an upcoming article with more information on prescription for Body Corporate contributions).
2.1 Appearance and Plea
Once the debtor receives the summons, they have a limited period (ten Court days) to respond by serving a document called a "Notice of Intention to Defend" and filing it at Court. If the debtor fails to respond within the given timeframe, the creditor may lodge a request for default judgment at Court.
Should the debtor defend the action, they have 20 Court days to deliver their plea, being the answer to the claim of the creditor.
- Judgment
With the collection process, judgment is either given by way of default judgment, summary judgment or after trial proceedings.
3.1 Undefended Action: Default Judgment
If the debtor does not respond or successfully defend the claim, the creditor may apply for default judgment. If the debtor has not provided any defence, it is in most instances because they cannot mount a valid defence.
A request for default judgment may require physical appearance in Court or is decided on the papers before the presiding officer on the hearing date. If no query is noted by the presiding officer, judgment is awarded to the creditor. A query shall usually relate to the documents in support of the creditor’s claim, how the claim’s calculation was computed or to clear up where uncertainty may arise.
3.2 Defended Action: Summary Judgment
If the debtor gave notice of its intention to defend and serves its plea, this is in most instances followed by an application for summary judgment by the creditor, should the debtor note their defence on mostly baseless denials. Summary judgment is a tool to assist the creditor get their desired judgment, without having to be prejudiced by entering protracted litigation proceedings until trial, summary judgment also serves to preserve judicial resources.
3.3 Defended Action: Trial Proceedings
If a summary judgment is unsuccessful or not feasible, the litigation process shall endure. This is usually where the parties exchange documents to be used in trial through discovery, and a pre-trial conference is held to discuss the matters concerned in trial. Arguments and evidence are presented by both parties and brought before Court. The presiding officer, be it a Magistrate or Judge, then makes a finding on the arguments and evidence before them. This shall delay the creditor obtaining its funds, but the creditor can be assured that interest from date of summons and legal costs escalate and are most likely awarded to the creditor in the event that judgment be made in their favour.
- Execution
After obtaining a judgment in their favour, a creditor may proceed with execution of the judgment. Execution involves taking legal action to enforce the judgment and recover the outstanding debt.
There are various methods of execution, including:
4.1 Warrant of Execution
This allows the sheriff of the court to judicially attach, remove and sell the debtor's movable assets to satisfy the debt. If the debtor does not own sufficient movable property, the sheriff shall issue a nulla bona return of service, which in turn gives the creditor the option to proceed with attachment of immovable property or insolvency proceedings against the debtor.
4.2 Attachment of Immovable property
The Court can authorise the attachment and sale of the debtor's immovable property to satisfy the judgment debt, this process is brought through an application to Court and involves quite a few administrative steps such as instructing a valuator to present the proper reserve price for the property should the application be granted, an auction date will be set by the sheriff. This process may take a few months to complete seeing that the attorneys shall be subjected to Court rolls and sheriff dependability.
4.3 Further alternatives
Some alternatives to execute judgment debt may be emolument attachment orders or garnishee orders. From our experience, these alternative measures only result in a undue delay in the collection of debt as a debtor’s tenant may move out shortly after the order is granted or the debtor may seek alternative employment.
4.4 Insolvency Proceedings
In some instances, an individual or company’s debt exceeds the value of their assets. The main purpose of insolvency proceedings and the order that shall follow from Court, to sequestrate the individual’s estate or liquidate the company, is to secure an equitable distribution of the debtor’s assets among all his creditors. This is not as much a form of the collection process but rather an avenue pursued to protect the creditor’s rights and at the very least obtain a portion of the monies due to it.
Some of the debt collection services we offer include commercial debt collection, collection of outstanding rental and arrear levy contributions, expert advice on alternative and more effective procedures such as insolvency, and an overall hands-on approach to collection matters with the professionals personally involved in the entire process.
The debt collection process in South Africa follows a well-defined legal framework designed to protect the rights of both creditors and debtors. From the initial letter of demand to the final execution stage, each step plays a crucial role in facilitating the resolution of outstanding debts. It is important for both parties to be aware of their rights and obligations during the debt collection process to ensure a fair and transparent resolution of financial disputes.
This article is not intended to constitute any form of legal advice. Want to know more? Please get in touch. We look forward to hearing from you.