Indicators show that the micro-lending industry has been growing quite substantially over the past few years. On the flip side, indicators also show that the number of consumers with impaired credit records is also growing sharply, as also the number of consumers placing themselves under debt counselling. Despite this, both formal and informal credit agreements still form a large part of the South African business economy ranging from simple loan transactions for small amounts of money lent and advanced between two private individuals, to incidental credit agreements arising from transactions where services or goods are sold on credit between a business and its clients, to complex loans agreements provided by banks. With such a multitude of credit agreements being entered into on a daily basis, it is quite important that the credit provider obtains quality information on the debtor in case it becomes necessary to recover the debt after the debtor fails to comply with the terms of the agreement at a later stage.
Understandably creditors measure success in recovery of arrear debts in terms of money collected versus money spent on attorneys and debt collection agents in the collection process. However, what is often overlooked is that the success of the collection or debt recovery process depends on the quality of the information on the debtor gathered and kept by the creditor.
The information on the debtor has a huge impact on the turnaround times for the collection process, because the less information the creditor keeps on the debtor, the more time consuming it becomes for the collecting agent or attorney to gather information and trace the debtor to recover payment. More importantly, with the advent of the National Credit Act and, more recently the Consumer Protection Act, certain requirements must be met before the formal collection processes can commence, which further prolongs the recovery of the debt if measures that comply with legislative requirements are not put in place.
The goal is to obtain as much details of the debtor as is possible in order to locate and determine what can legally be attached to pay for the outstanding debt. It is also important to gather as much information as is possible to determine the debtor’s affordability of the debt (i.e. the net worth or income of the debtor) in order to satisfy payment.
The following may be regarded as essential information for the collection process:
- Complete names of the debtor and identity number where the debtor is a natural person, or the full names of the company directors and their identity numbers as well as the registration number of the company where the debtor is a company or another form of business entity.
- All contact details of the debtor being the mobile phone number, telephone numbers at home and at work, postal address and more importantly the physical home address.
- Work or business address, and where possible, further requests to the debtor to choose or appoint an address where you can send him notices related to the transaction, and also requests for contact details of two relatives or friends of the debtor.
- The creditor should further obtain information to its satisfaction that the debtor will be able to pay the debt. The enquiry should ascertain facts pertaining to the credit record of the debtor, which can easily be obtained from internet-based programmes linked with the various credit bureaus; the income of the debtor and when it is due; the debtor’s assets in the form of movable and immovable assets and the debtor’s debtors (i.e. people owing the debtor money).
- A creditor would serve itself well to ensure that the debtor signs a properly drafted acknowledgement of debt form as part of its credit application process in order to expedite the collection process. Such a document assists in reducing the number of hoops the creditor has to jump through in order to recover the debt in terms of the law.
The above information is a tool at the disposal of the creditor to manage or reduce the risks associated with credit agreements. Naturally, the bigger the transaction, the bigger the risks and the more the need arises for the creditor to put the abovementioned checks in place to protect itself from a defaulting debtor.
Owners of businesses that regularly enter into credit agreements should consult a legal practitioner to ensure that they have standard documents for clients or customers to complete that, where possible, requires the above information and is signed by the debtor, thereby greatly assisting with any formal collection process that may need to be instituted at a later stage.