When Debt Brings Down The House

Owing plenty on credit cards, personal loans or overdrafts doesn't put your house at risk, right? Wrong, thanks to 'charging orders'!

All homeowners will be familiar with the wealth warning that accompanies all mortgages:

"Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it."

In other words, secured debts, such as mortgages, second mortgages and secured loans, put your property at risk if you do not keep up your monthly repayments. In the worst-case scenario, a lender may repossess (seize) your property and sell it, usually at auction, in order to recover sums owed.

On the other hand, unsecured debts (alias consumer credit), such as credit cards, personal loans and overdrafts, aren't secured against your home. This makes them riskier for lenders, which explains why interest rates on these forms of borrowing are far higher than mortgage interest rates.

So, if you owe a lot of money via consumer credit, then your home isn't at risk, right? Wrong, thanks to a legal procedure known as a charging order!

A charging order is a court order which allows a lender to secure personal debt against property. Thus, if you fall into arrears or default on an unsecured debt, then a lender can turn a hefty credit-card bill into a loan secured against your home. Charging orders can also be granted against land, commercial property or other assets.

Armed with a charging order, a lender can be confident that it will get its money back at some point in the future. Note that a charging order does not force you to sell your house immediately. Indeed, it is quite difficult to repossess a property using a charging order, making these seizures extremely rare. Hence, a lender with a charging order is usually content to sit tight and await repayment when your home is eventually sold.

So, although a charging order is unlikely to lead to your home being repossessed, it does mean that you cannot sell your property until all secured debts -- including any charging orders -- have been paid off. Consequently, a charging order effectively gobbles up some your housing equity in order to replace other debts.

Alas, according to the latest figures from the Ministry of Justice, the use of charging orders by lenders is rocketing. Here are the latest data:

Charging orders, 2000 to 2007

As you can see, the number of charging orders granted almost tripled between 2004 (32,953) and 2007 (97,017). Even worse, their use has risen tenfold since the turn of the century. This sharp rise reflects three trends:

1.    the huge amount of wealth tied up in property;

2.    the massive increase in personal debt over the past decade; and

3.    the increasing willingness of lenders to get their money back by any means possible.

Obviously, as pressures build on hard-pressed homeowners, it's highly likely that the use of charging orders will continue to soar. In short, consumers with too much debt risk putting their homes on the line. So, before you stick another few hundred pounds on an already red-hot credit card, ask yourself the following question:

"Could my over-spending and being overly dependent on debt eventually wreck my housing wealth?"

If you are at all unsure about the reply, then it's time to Get Out of Debt today!

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