Acknowlegement of Debt

What is an Acknowledgement of Debt and what is its use?

An Acknowledgement of Debt (“AOD”) is an agreement which contains a clear admission of liability by one party to another, together with an arrangement as to how this liability will be settled. This liability is usually the obligation to pay an amount of money (“debt”) to the other party.

There are various examples of instances that may give rise to such a debt, such as a motor vehicle accident where one party acknowledges to be indebted to the other for damaged caused to their vehicle, or where one party has loaned an amount of money to the other which is to be repaid.

Every agreement will have at least two parties, being a debtor and creditor, the creditor being the party to whom the amount is owed and the debtor being the party who is liable to make payment. Where parties are married in community of property, or where more than one person is responsible for the particular debt, more parties will be added.

AOD’s may be entered into between natural or juristic persons.

An AOD can be entered into at anytime after a person has admitted liability, whether immediately after the debt has been incurred, after receipt of letter of demand or even after the issue of summons.

 

What happens if a debtor does not comply with the terms of the AOD?

In order to be useful and worthwhile, an AOD must contain a breach clause which will determine what happens if a debtor fails to make payment in terms of the AOD.

This breach clause may differ from agreement to agreement, but will typically provide for the following:

  • The breach clause will provide that if the debtor fails to make payment of any instalment due, that the full balance of the outstanding amount will become immediately due and payable.
  • If the debtor then fails to make payment of the full balance after demand therefor, the creditor may apply to the Magistrate’s Court for judgement against the debtor for the outstanding amount plus legal costs.

 

Benefits of having a signed AOD

The AOD is a written document containing a clear acknowledgement of the debtor’s liability to the creditor. As such, the creditor can approach the Magistrate’s Court for a provisional sentence action based solely on the AOD. By this means, a creditor can obtain a judgement without the cost and delay of an ordinary action and trial, as the creditor does not have to set out the material facts as to how the debt came to be.

 

What should be included in an AOD and what must be kept in mind

 • An AOD should include the payment terms, a breach clause and domicillium address of both parties.
 • AOD’s will always be subject to general laws of contract, at its very least, the AOD and the basis of the debt must be lawful and both parties must have contractual capacity.
 • The debtor’s income and expenses, as well as other judgements and creditors should be included. This information will reduce the risk of the Magistrate’s Court not granting an order in the case of non-payment due to affordability issues.
 • Parties may also consider agreeing to the jurisdiction of the Magistrate’s Court, irrespective of the fact that the debt may exceed the monetary jurisdiction of the Court. This will help to keep costs to a minimum should the creditor need to apply for judgement in the case of non-payment.

 

What is the difference between a credit agreement and AOD

An AOD should not be confused with a credit agreement, or used in substitution for a credit agreement. Credit agreements must be done in terms of the National Credit Act, which will prescribe all the terms that may be agreed upon and will also set out the requirement for a valid agreement.

In order to enter into a valid credit agreement, the creditor must be a registered credit provider. Various requirements must be adhered to, such as an affordability assessment being conducted.

An AOD is less formal and parties may freely agree on the terms of their agreement, based on their relationship. No assessments or other documentation is required. The creditor does not need to be a registered credit provider and will typically not be in the business of lending money. The basis for AOD’s will most often be friends or family lending money to each other or where a business enters into a payment arrangement with a client in order to avoid or at least reduce litigation costs.

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