THE TROUBLE WITH EAOs

If you have an emoluments attachment order (EAO) against you, be wary of anyone offering to negotiate a rescission of the EAO with your creditor.

An EAO is a court order. It compels your employer to deduct from your wages or salary money that you owe a creditor who has taken default judgment against you.

“An EAO can’t be negotiated away, and nor can anyone ‘negotiate’ a rescission,” Deborah Solomon, the founder of the DCI, cautions. The DCI is a debt counselling industry portal and company that offers debt counselling services.

“The only way to obtain a rescission is by way of an application in the court where the default judgment was issued. It’s a legal process,” Solomon says.

To rescind a court order is to cancel or revoke it. An EAO can be rescinded if the debtor has a bona fide defence, which can include not consenting to the EAO, or the court not authorising the EAO, or it being brought in the wrong jurisdiction.

Even if you are able to get your EAO rescinded, you, the debtor, remain liable for the debt. This is because a default judgment is valid for 30 years. It does not prescribe. A debt prescribes, or lapses, only if your creditor does not institute civil proceedings against you within three years of your last payment.

An EAO can be reinstated within the 30-year judgment term.

Solomon says the DCI assists consumers to have their EAOs rescinded, and it has seen a trend among debt collection attorneys, such as Flemix & Associates, that once an order is rescinded, the attorneys try to have it re-issued.

“Employers need to be more vigilant when legal documents are served on them, and they need to challenge a sheriff attempting to serve an order that has been rescinded. Should this happen, it is the responsibility of the employer to report the matter to both the Law Society and the Sheriff’s Board, as these types of unscrupulous tactics are not uncommon in the ‘EAO industry’,” Solomon says.

BIG MONEY

EAOs are not only an easy method of recovering debt, they can also be lucrative to administer.

To compensate the employer for the administration of the order (which involves paying over the instalments to the credit provider or the credit provider’s debt collection attorneys each month), the employer is paid five percent of the amount deducted each month.

An industry of sorts has sprung up in the administration of EAOs, Solomon says. Players in this industry offer a solution to employers who find it onerous to manage their administration, and some are only too happy to outsource this function to companies that not only manage the payment of money to creditors, but also check on the legality of the orders. Employers are also beginning to recognise the importance of the financial well-being of their staff.

But Solomon says employers need to be careful who they engage to check the legality of these orders, because this work is specialised and calls for legal and other expertise.

On the face of it, many EAOs appear to be legal, but are not, she says. However, it can be complex to determine whether a consumer has a bona fide defence, because there are many factors to consider when seeking a rescission of this nature.

Solomon says a bigger problem is that a company being paid a percentage of the debt collected has no incentive to scrutinise the legality of the EAOs. She recommends that employers engage a company that is separate and independent of the administrator to check the legality of orders, as this introduces a healthy system of checks and balances.

“The administrator’s role is to pay the creditor and make sure that payments stop when the debt is paid in full. There’s nothing wrong with an administration company claiming the five percent monthly fee for administering the order, but problems arise when the employer had an expectation that the orders had been checked for legitimacy, only to find out later that this wasn’t done properly,” Solomon says.

ABUSES

The five-percent fee to administer the EAO (whether the employer is doing it or has outsourced the work to an administrator) is payable by the credit provider, and not the indebted employee. In other words, the fee should not come off the EAO amount.

“But that is not always what happens, and that is one of the abuses,” Frans Haupt, the director at the University of Pretoria Law Clinic, said at a recent conference hosted by the Department of Trade and Industry on strategies to address over-indebtedness.

Research by the University of Pretoria Law Clinic documents the problems with EAOs, including the use of fraudulent orders, gross over-charging of legal fees and the issuing of duplicate orders.

Haupt said employers had enlisted his department to audit EAOs and look for irregularities. “Attorneys are more afraid of losing business than they are of the Law Society. Lots of complaints have been lodged with [the law societies], but it doesn’t seem that justice is being done.”

Kalay Pillay, the deputy director-general of legislative development in the Department of Justice and Constitutional Development, told delegates at the conference that the department was working on the second draft of amendments to the Magistrates’ Courts Act dealing with EAOs.

Pillay said the amendments provide for an assessment of a debtor’s finances before an order is issued – to give the debtor a chance to make submission to the court on his or her indebtedness; for the order to be served on the debtor and not just the employer; and for the debtor to be given free monthly statements.

Stephen Logan, an attorney who specialises in credit law, says proposals made by the national credit industry steering committee are more extensive than the amendments being proposed by the Department of Justice and Constitutional Development.

“The proposal makes provision for EAOs to be limited to, at most, 30 percent of the gross income of the debtor. Many industry experts believe that even 30 percent is extremely high.

“The technical committee of the National Credit Regulator was considering the incorporation of the proposals into the regulator’s draft code of conduct for credit providers and to further limit the term under which EAOs may be used to collect debt to a maximum of five years. In addition, it was believed that all EAOs should be listed on the credit profiles of the debtors to improve the accuracy of affordability assessments,” Logan says.

Solomon says that, since an EAO is in respect of a judgment debt, it “must be reported to the credit bureaus and be reflected on your credit report, because it adversely impacts how much credit you can afford”.