Over-extended debtors are being exploited by unscrupulous administrators, writes Penny Sukhraj
South Africans caught in a spiral of debt now find themselves prey to a new kind of entrepreneur, the administrator, who convinces them that the only way to get out of the vicious circle of servicing debt is to have their estates administered by court.
Investigations by the Micro Finance Regulatory Council and the Banking Council have exposed evidence that over-extended debtors are being exploited by what they refer to as an ""industry"" of debt administrators. This industry has emerged in the wake of the credit bubble at the lower end of the credit market during the late 1990s.
The Banking Council has in its possession examples of administrators who have placed thousands of people under administration, making millions in the process, while the creditors' debt has remained untouched for almost two years.
Administration orders were created to protect borrowers in dire debt problems - people with few or no tangible assets and owing under R50 000 - and to ensure the equal treatment of their creditors.
Magistrates' courts work out a repayment schedule and appoint administrators to collect money from the debtor and then redistribute the money to creditors in return for a fee.
But African Bank director Johan de Ridder says the debtor is not told about administration costs or the fact that while the debtor is being administered, he or she may not enter the credit market, or gain credit at all. Doing so amounts to fraud.
""The fact that the debt is re-scheduled does not mean interest on the debt stops accruing.
""Instead, interest is further accumulated on the amounts in arrears,"" says De Ridder.
He says the problem with going under administration is that only the formally employed sector, which consists of about nine million people, is targeted.
""And of this, about 700 000 will be under administration by the end of the year. They will be taken out of the economy, and will not be in a position to contribute to the growth of the economy.""
Recent estimates from business intelligence firm Trans-Union ITC indicate that there are about 650 000 people whose affairs are being handled by debt administrators under Section 74 of the Magistrates Court Act.
Instead of the 12.5% fee that they are allowed, administrators have found a loophole in the law which allows them to appropriate up to 22% of the debt towards their own costs.
""This means that in a majority of cases, a person's creditors will see only about 5% of the money owing being repaid for the first two to three years, depending on how long they are going to be administered,"" says De Ridder.
Peter Setou, Micro Finance Regulatory Council manager for education and communication, says an investigation into the abuse of administration orders in 2002 found that a number of South Africans were placed under administration when they should not have been.
""Other administrators found that if a certain magistrate was diligent enough to question the legitimacy of an administration application, then the administrator would no longer bring applications in that court and instead took them to another court.
""And in many cases, people are under administration for over five years, but when you look after two years, you find that the debt owing to creditors is virtually untouched, because the administrator has pocketed monies, which he calls his 'administration costs',"" says Setou.
He says that while there are good administrators out there, a sizeable number do not explain that once you are under administration, you end up in perpetual debt.
Christo Schoeman, president of the National Association of Administrators, says it is busy negotiating a code of conduct for administrators, but is waiting for response from the Banking Council on the issue of costs.
""We're also launching a campaign to get the correct facts to the public. The truth is that the majority of blue-collar workers are over-loaned, and if the Banking Council is saying that we are abusing the process where orders are granted by the court, then they are also suggesting that the courts are permitting the malpractice,"" says Schoeman.
Banking Council general manager Prince Maluleke says the industry urgently needs regulation.
""They are not supposed to go out and solicit for work and that is what is happening, because there is no regulatory body controlling them,"" he says.