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Watch out for common law rule on debt

A Fin24 user is questioning the in duplum rule as his employee's debt increases instead of getting less. He writes:

We have an employee who has a garnishee order (2006). The employee is paying the stipulated amount as stated by the court, yet every year the outstanding amount increases.

Does the in duplum rule in terms of Section 103(5) of the National Credit Act apply to where judgment was taken prior to 2005?

Lauren Wepener, Consumer Care Expert at Compuscan responds.

The National Credit Act’s Section 103 in duplum rule unfortunately does not apply retrospectively. This means that your employee’s credit agreement is subject to the common law in duplum rule.

The principle of the in duplum rule is that outstanding interest may not exceed the amount of the original capital debt. Other costs such as administration charges and legal fees are not included in this threshold.  

Also, once a payment brings the outstanding interest amount to an amount lower than the original capital debt, interest runs again until the threshold is once again reached.  

This means that your employee is in all likelihood making payments which are reducing the interest amount to below the threshold, which allows outstanding interest to run again. In addition to this, it may be that other charges (which are not capped under this rule) are being added on a monthly basis, having the effect that minimum payments will never eradicate the debt.

In contrast to the common law rule, the National Credit Act’s in duplum rule includes outstanding interest, the initiation fee, service fees, the cost of credit insurance, default admin charges and collection costs in the in duplum threshold calculation.  

This will naturally have the effect of dramatically reducing the amount of outstanding interest that can accumulate. In addition to this, for as long as the default exists, interest does not commence to run again, nor can further charges be added once the threshold has been reached. This will naturally afford the consumer a much better chance of repaying the debt.

Your employee may want to consider applying for a consolidation loan to pay off the existing loan and then take up a new agreement that it is subject to the National Credit Act, which offers defaulting consumers a better measure of protection.

- Fin24

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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