Acknowledge your debt in writing
What is an Acknowledgment of Debt?
- An Acknowledgment of Debt (“AOD”) is an agreement containing a clear and undeniable admission of liability by one party to another.
- The liability usually relates to the payment of a sum of money (“debt”) that must be made by one of the parties to the other party. For example, an AOD may be entered into where a party who caused a motor vehicle accident agrees to pay a sum of money to the other party in order to repair the damage caused to their motor vehicle.
- There are two parties to the agreement, which are referred to as the debtor and the creditor. The creditor is the party that is owed money in terms of the agreement and the debtor is the party who is liable to make payment in terms of the agreement.
- Both the creditor and debtor can consist of more than one person, for example, where the creditor/debtor is married in community of property or more than one person was responsible for the debt (co-debtors).
When and who can you enter into an AOD?
- Although an AOD can be entered into at any time after a person has admitted liability, it is often entered into after a person has received a letter of demand or has been served with a summons demanding payment of a debt.
- There are no restrictions as to who qualifies as a debtor or a creditor. Both natural persons and juristic persons, such as a business, may enter into an AOD. For example, where money is lent between friends and family, or a business acknowledges its indebtedness to a service provider.
What happens if the debtor fails to make payment in terms of the AOD?
- It is advisable that an AOD contains a breach clause making it clear that if the debtor fails to make payment on the due date/s, the full balance of the outstanding amount becomes due and payable (together with legal costs).
- Should the debtor then fail to satisfy the full balance of the outstanding amount immediately after demand, the creditor, without further notice, shall be entitled to apply to the relevant Magistrate's Court (“court”) for judgment against the debtor for the outstanding amount including legal costs.
- Since the AOD is a clear written document upon which the debtor is admitting liability to the creditor, the creditor can approach a court with a provisional sentence action based on the AOD alone.
- A provisional sentence action is a process where a creditor holding a document containing a clear acknowledgment by a debtor, can secure a judgment without the expense and delay of an ordinary trial action.
- The creditor will not have to set out the material facts of how the debt came into existence, which in turn will result in a quick and inexpensive litigation process.
What are the requirements of an AOD?
- In addition to a clear and undeniable admission of liability (“IOU”), the agreement should contain the payment terms, a breach clause, and the signatures of both the creditor and the debtor.
- No two agreements are identical, and most AODs will vary as the parties may freely agree on the terms governing their agreement based on their relationship. The AOD is, however, subject to the general rules of the law of contract, so facts giving rise to the debt must reveal that the agreement is lawful and that the debtor has the required legal capacity.
- The Magistrates’ Courts Act 32 of 1944 (“Magistrates’ Courts Act”), states that an AOD must, in addition to setting out the offered installment amount, set out full particulars of the debtor's:
- monthly or weekly income and expenditure, supported by proof where reasonably possible; and
- a list of court orders or agreements, if any, with other creditors for payment of a debt and costs in instalments.
- The above information should be included in the AOD to mitigate the risk of a court order not being granted should the matter go to court due to the debtor’s failure to make payment.
- The information is necessary as the Magistrates’ Courts Act requires the court to consider certain factors when making a just and equitable order, such as:
- the amount and nature of the debtor’s income;
- the amounts needed by the debtor for necessary expenses and those of the persons dependent on him/her, and for the making of periodical payments which s/he is obliged to make in terms of an order of court, agreement or otherwise in respect of his/her other commitments; and
- whether the order would, in the circumstances of the case, be grossly disproportionate.
Can the parties agree to the jurisdiction of the Magistrate’s Court regardless of the amount of the debt?
- Yes, the parties may agree to the jurisdiction of the Magistrate’s Court regardless of the fact that the debt exceeds the normal monetary jurisdictional limit of the court.
- It is important that both parties’ consent is expressly reflected in the AOD.
Is an AOD and a credit agreement the same thing?
- No, an AOD should not be mistaken with or used in substitution for a credit agreement.
- A credit agreement must be done in terms of the National Credit Act 34 of 2005 (“NCA”). The NCA clearly prescribes the terms that may be agreed upon and requirements of a credit agreement.
- In order to enter into a credit agreement, the creditor must be a registered credit provider with the National Credit Regulator and must comply with the requirements of the NCA, for example, an affordability assessment must have been conducted and certain documents must be requested by the credit provider.
- With an AOD, besides the presence of an IOU, parties may freely agree on the terms governing their agreement based on their relationship, and no assessments or documents are required.
- The creditor does not need to be a registered credit provider and is typically not in the business of lending money to consumers. An AOD is for this reason ideal where money is lent between friends and family, or where a business wishes to avoid litigation costs and is willing make a payment arrangement with a willing client.
- In addition to this, an AOD typically exists as a result of an incidental occurrence, for example, a debtor not being able to pay one of their creditors or an accident that causes damages to a creditor’s property.