You can’t go to jail for debt…

I was thinking about debt this morning because the new National Credit Act seems to be having a few unintended side-effects, making it a very mixed blessing. It’s a bit like radiation therapy: it works because it kills off the cancerous bits, but the process it also kills off lots of the good bits as it works its magic.

More than a decade ago creditors (the nice people that lend you money — who are not the same as the people that collect the money) were able to put you in jail for ludicrously small amounts of debt.

At the time I was having some interesting challenges, and frequented the local (Somerset West) Magistrates Court on “debtors” day — usually a Friday. It was always crowded, and without any refreshments. One would arrive at 9 a.m. and sit anxiously until 1 p.m. while the creditors’ attorneys did their very best to waste your time. Their job was to make it so uncomfortable that you would miss the next appointment, be adjudged in contempt of court, and they could throw you into jail where you could share a cell with some very assertive and hygienically challenged people with an unhealthy interest in your bottom.

Bottom line: debtors paid rather quickly, often by borrowing money from shady persons who found it easier to wield a baseball bat than a magistrate’s gavel when collecting their debts!

Around about this time the law changed, and you could no longer be sent to jail for debt, or anything arising from debt. It changed in midweek. The following Friday I packed my lunchbox and prepared for another interesting day of being humiliated. I was the only person there! All the other debtors had heard about the change in law, and decided to take Friday off to go fishing, or drinking, or whatever.

In many respects the new credit Act helps debtors — especially debtors at the bottom of the commercial hierarchy (those folk without income or who cannot read) who are the prey of some salespersons of low ethical stature. Unfortunately, in helping them the Act severely limits entrepreneurial activity. Let me explain.

We small business owners typically finance our business ventures ourselves. Not for us the heady venture capital billions.

We cobble together what we can find — some savings, an extension to the bond, a few credit cards, and anything else we can scratch together — and use that to finance our efforts.

The bank typically will not finance the business at this point. (They will give it an overdraft, but only provided you sign away a large chunk of your house — possibly the lounge and the main bedroom. They are not financing the business — they are financing you — and you sign a surety to prove it. You can get all the gritty detail from the Crashproof Your Business book.)

The biggest problem is that the amount of risk that you are allowed to take no longer depends on you but depends on some government person sitting in a remote office who determines that your salary is not sufficient to borrow the money that you need to start your business.

As I understand the Act, which is rather difficult to do because it is not quite as complete as one would wish, the moment you sign a surety (and your spouse will do so at the same time probably) the entire value of that surety is regarded as a loan, and the entire value of that surety is deducted from the amount of money you are allowed to borrow.

That means that the R100,000 that your business has borrowed knocks R100,000 off your personal borrowing capacity, and R100,000 off your spouse’s personal borrowing capability. (And this will last forever, because banks are amazingly reluctant to ever release a surety.)

As I was saying about not completely understanding the Act, I notice that many of the debt counsellors appointed in terms of the Act are going bankrupt themselves because the government hasn’t quite worked out how much they should be paid, for what work, when, or how. It’s an exciting time — as it always seems to be with the introduction of new legislation.

Compounding the problem is the fact that most business owners do not have a regular salary. This also limits their ability to borrow money.

As the business becomes more successful, and as the business borrows more money, and as they sign more sureties, their ability to borrow money grinds to a halt because they are being evaluated on the same scale as an indigent farmer with three cows in a hut on a hilltop 7 miles away from the closest road.

If you do manage to borrow money, and government subsequently asserts that the lender was not cautious enough — and managed to get you into real trouble as a result — then the debt can be set aside. In other words, you don’t have to pay. Of course, no lender wants to be in this position, so they are even more cautious than they might otherwise be. Which means even less available for you to start the next mousetrap empire.

That’s enough for now.