More Pain For Homeowners In Debt

Some credit card and personal loan providers are placing financial claims on homes after just one month of missed debt repayments, The Fool has discovered.

According to Citizens Advice, lenders are increasingly using charging orders to ensure full repayment of debts, with some taking this drastic step after just one month of arrears on a credit card or personal loan.  

What's a charging order?

A charging order allows the lender to make a financial claim on your property - so when you sell it, you are forced to use some of the proceeds to pay off your debt.

It's not like a mortgage because the lender cannot repossess the property if you fall behind with your payments. This means lenders do not have to warn you that your home is at risk if you fail to keep up repayments on a credit card or unsecured loan.

Despite this, once the lender has a charging order from the courts, it can go back to court and try to get an order for sale.

What's an order for sale?

Orders for sale force you to sell your home immediately to pay off your debts - just like you have to when a mortgage lender seeks repossession.

While orders for sale remain difficult to get - the judge will take into account your needs, attitude and behaviour as well as the needs of your dependents and weigh this up against the needs of the lender - Citizens Advice counsellors are reporting a rise in the number of orders for sale being granted.

Unfortunately, there is no official data on this, because orders for sale are not officially monitored in the way that repossession figures are. So it is difficult to know how just how many lenders are going down this route following the credit crunch.

There are Ministry for Justice figures available for charging orders, but the latest available are from 2007. These show that there were 97,026 charging orders granted last year - a tenfold increase since 2000.

The credit crunch is likely to have made matters even worse this year. Citizens Advice is concerned that, over the next few years, lots of people could end up facing orders for sale for relatively small debts, compared to the value of their property.

For example, the charity has even found that some charging orders have been granted for as little as £1,000 of unpaid debt. While an order for sale is unlikely to be granted in such a case, it demonstrates just how aggressive lenders are becoming towards homeowners who do not pay their unsecured debts.

The worst offenders

According to anecdotal evidence from counsellors at debt charity the Consumer Credit Counselling Service (CCCS), Northern Rock is one of the worst offenders when it comes to placing charging orders on debtor's properties.

Counsellors from the charity say they regularly see cases where the lender has placed a charging order on the unsecured element of its 125% Together mortgage. (The Together mortgage was made up of a 95% mortgage and up to a 30% unsecured loan on top.)

This means debtors cannot easily prioritise their mortgage debts and then work out a debt management plan for the rest.

The charity claims the situation has got so bad that courts in Newcastle have had to be block-booked to allow Northern Rock to get through the number of charging orders it wants placed on properties.

Northern Rock refused to comment on whether courts have had to be block-booked, merely stating that the administration of the court was the responsibility of the Court Offices.

A spokesperson did say that there had been an increase in the volume of charging order it is placing on properties in 2008, but refused to give specific numbers, merely stating it was not a "large" increase.

Of course, Northern Rock has a lot of borrowers who are in negative equity, so this is not surprising. But in my opinion, Northern Rock has been treating its borrowers appallingly, ever since it was nationalised (read Why I Blame Northern Rock to find out why).

Still, Northern Rock is by no means the only high street lender to use charging orders regularly. Counsellors at the CCCS have also reported anecdotally that some lenders - "even responsible lenders like Nationwide" - make a practice of going for a charging order when a debtor has fallen into arrears.

A Nationwide spokesperson refuted this, claiming the building society only used charging orders "infrequently" and that they were not "enforced" - implying orders for sale are rarely sought.

The CCCS also named Natwest as a lender which this year has increasingly turned to charging orders to secure debts. It claims some of its counsellors have seen a rise this year in the number of charging orders Natwest has placed on a property.

Natwest says going down the lititgation route is a last resort which it looks to avoid where at all possible.

Should all this worry you?

As long as you keep up with your minimum debt repayments, you have no need to worry about a charging order being placed on your home. Even if one was attempted, a judge would be likely to throw it out of court.

If you're struggling to meet your debts, don't panic. It is not in a lender's interests to try to repossess your home in a falling market. And a judge will consider your side of the story very carefully if it does go to court.

But that doesn't mean you can forget about your debt problems and hope the situation simply goes away. Take control and seek help. Get in touch with a free debt charity such as the CCCS or Citizens Advice, or ask your fellow Fools for advice via our Dealing With Debt and Living Below Your Means discussion boards.

But please, whatever you do, don't bury your head in the sand. It's never too late to deal with debt, but the longer you leave it, the worse it will get..

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