Charging Orders - Threat or security?

A common collection method enforced by creditors against homeowners in debt is a Charging Order. This type of judgment debt can be very complex, so Debt Management Today spoke to a number of experts within the industry to discover exactly what debt management companies can do to help when they meet a client facing this threat...

What is a Charging Order and how does it work?

According to Michael Fitch of the Fairpoint Group, “A Charging Order – or more precisely an Involuntary Charging Order – occurs when a creditor applies for an unsecured piece of credit (such as a credit card or unsecured loan) to be secured against a property.

“This then provides the creditor with a degree of security, and allows them to receive a share of any equity in the property in the event of sale.”

JP Benitez, Director of Operations at InDEBT Expert added: “A charging order is a type of enforcement used by creditors when attempting to retrieve owed funds. Many people are under the belief that this type of enforcement means the person will lose their home once successful, but this is not the case. There is, of course, a process all creditors must follow which involves acquiring a CCJ and determining the debtor’s full circumstances.”

Vance Parsons, Director at EuroDebt, explained further. “To take out a Charging Order, a creditor must take the debtor to court and can only do so if they have already got a County Court Judgment (CCJ) or other court order and the debtor has not kept to the terms of the order. The application for a Charging Order always has two stages. These are an interim order and a final order.

“An interim Charging Order is granted by the court to stop the debtor from selling the property without the creditor knowing, before the final order can be made. If a court grants the creditor a final Charging Order, this means that the property cannot be sold without the creditor being paid out of the proceeds.

“However, a final Charging Order doesn’t mean the debtor will have to sell their home. If the creditor wants to force the sale of the property, they will have to apply to the court for an Order of Sale.”

So how does a Charging Order turn into an Order for Sale?

If an Order for Sale is made by the creditor it can have severe consequences for the debtor, who is usually faced with two choices: pay the debt within 28 days or leave the property. If neither of these options is chosen voluntarily by the debtor, a Possession Warrant can be applied for, which is an order forcing eviction from the property.

With these serious consequences a possibility, I asked Michael Fitch to tell me more. “For the large majority of cases, a creditor is happy to simply have the security of owning an interest in the property,” he said.

“In extremely rare cases, however, a creditor may apply for an Order of Sale. This may be because a “time to pay” order has not had its instalments maintained, or because the time taken to repay the debt is simply too long.”

Vance detailed the court process involved. “The debtor should seek advice as early as possible before the court hearing from a legal representative or a specialist adviser as the legal situation can be very complicated.

“The court can order a sale where the debt is in a sole name and the debtor is the sole owner of the property, or the debt is in joint names of the joint owners of the property. If the debt is in a sole name and the property is in joint names, the creditor can apply for an Order of Sale to realise their interest in the property. A creditor will have got an interest in the debtor’s share of the property when the final Charging Order was made.

“If there are joint owners of the property but the debt is only in your name, it may be more difficult for the creditors to get an order for sale. That’s why it’s important for all joint owners to go to the court hearing for the Order for Sale so they can explain their situation. This includes a husband or wife who is not a joint owner, but who will have an interest in the property.”

What will influence a court’s decision in the case?

Vance added, “The court can decide that it’s unfair to force someone who wasn’t responsible for the debt to leave their home. It will also look at the interests of the whole family and decide whether or not these are more important than those of the creditor. Some of the things it will take into account include whether there is enough equity in the property to pay off the mortgage, and the Charging Order debt. If there isn’t, it may not be worth forcing the sale of the property.”

What can DMCs do to help?

“We can assist people in this situation in the following ways:

-      By restructuring their outgoing and including the amount required to satisfy the creditor with the Charging Order in their expenditure.

-      We can also include the debt within their Debt Management Plan and pay the agreed amount out of the client’s monthly payment to us.”

Michael stressed the importance of guidance from DMCs. “We can offer advice to the client in drafting a defence to take along with them to the hearing and advise on the process itself to try and put our client’s mind at ease.

“What is very important is that we try to assuage our client’s fears about what is happening, let them know that the judge is simply there to look at the situation fairly with everyone’s best interest at heart, and that a Charging Order doesn’t necessarily mean that they will lose their property.”

Vance added: “A good debt solutions provider will always assist debtors to manage their debts effectively, so that creditors are not forced to take out a Charging Order against them. But when the debts have got so far along that a Charging Order is applied, DMCs can still arrange for a payment to be made to the creditor, who would have to accept this.”

So how common is this type of enforcement method?

Vance agreed about the recent increase, but also stressed that Charging Orders are only usually applied for to secure a creditor’s interest rather than becoming Orders for Sale.

The future?

The OFT has carried out a review of the use of Charging Orders as a method of enforcing judgment debts. This is a result of a reported rise in the number of Charging Orders being granted where the debts initially arose under regulated consumer credit agreements. Vance explained, “The OFT is working to ensure that the whole banking industry uses Charging Orders and other debt enforcement tools responsibly. With this in mind, I don’t envisage any changes to how they should be applied but perhaps more enforcement in terms of when they should be applied.”

JP said: “The OFT did recently approach certain creditors addressing concerns for the enforcement of their consumer debts.

“Many would automatically assume that certain creditors are cutting corners given recent economical pressures but this is far from the case and all have co-operated fully with recommended changes... this should encourage debtors not to avoid contact with their creditors when facing financial hardship and seek professional advice, there are many reputable companies out there.”

Michael added, “The Ministry of Justice is reviewing Charging Order practice, with a view to making it easier for the charge to be put through. Their main proposals are to do with allowing Charging Orders to be created even when a judgment order is being adhered to, or by potentially removing the final charge hearing stage and simply having the interim charge become final by virtue of time elapsed.  

“The long and short of it is that it is likely court involvement will be reduced and the whole process streamlined.”The increase in the number of Charging Orders applications has meant that debt firms need to be adept at offering advice to clients who may be attending court hearings and facing judgments against them. After speaking to industry experts it seems that the key thing DMCs need to be able to do is listen, advise their clients on attending hearings and re-assure them that a Charging Order doesn’t necessarily mean that they will lose their home.

By Miranda Atty