Whether they know it or not, more than 700,000 households in England and Wales are at risk of losing their homes over debts as small as £1,000. New rules come into effect today governing the way that creditors can force the sale of property in order to repay outstanding sums on payday loans, credit cards and other forms of consumer debt.
The new regulations – the Charging Orders (Order for Sale: Financial Thresholds) Regulations 2013 – could prove controversial for two reasons.
First, they represent an about-turn by the Government, which had indicated in the Coalition Agreement in 2010 that a threshold of £25,000 would be set rather than the £1,000 limit that takes effect today.
Second, the numbers of people with charging orders on their property who could then go on to lose their homes could surge as house prices rise. Once a charging order exists on a property, the owners are only a step away from losing their home as their creditors can ask a court to force a sale in order to satisfy the debt. Just over 400 sales orders were made in 2011, the last year for which there are statistics.
Rising house prices mean that there is more equity in homes and that creditors are likely to get their debts paid from that equity if they force the sale of a home. House prices appear to be moving upwards after five years of stagnation.
StepChange, a free debt advice charity, is perturbed by the move to set a £1,000 threshold. Peter Tutton, head of policy, says: "The Government have reneged on their promise. We think there isn't sufficient justification." He believes that there will be more charging orders given in future, up from the 81,000 made in 2011 or the 93,000 in 2010. "I'd be surprised if we don't see more charging orders because it's easy for creditors to get them," he adds.
The chief executive of Citizens Advice, Gillian Guy, has "cause for concern" about the orders, "with lenders putting people's homes at risk for debts as little as £1,000. We believe that it should be set much higher to protect consumers."
There are two steps with charging orders. In the first place, a creditor applies for one after someone has a county court judgment (CCJ) against them for an unpaid debt of £1,000 or more. Until October last year, a charging order could only be given, in most circumstances, if the debtor then missed a repayment instalment as outlined through the CCJ. Now a charging order can be given at the same time as the CCJ.
Second, once the charging order is in place the creditor can go back to the court and ask for the property to be sold to repay the debt. But creditors will think carefully about the timing of this. A creditor with a charging order ranks behind a mortgage lender in terms of entitlement to the money from a house sale, so they will apply for a sale only if they think there is equity in the property. There is more likely to be equity in times of rising house prices. Several surveys show property prices going up this year. New schemes to help homeowners are also expected to push up prices.
The Government is nervous about being criticised over its change of heart on the threshold level. Until today's regulations there was no minimum limit at all, but the expectation had been that the Government would go for a much higher level, probably around £25,000. The Ministry of Justice says it changed its mind because creditors can make people bankrupt for debts of just £750 and it did not wish to push creditors to seek bankruptcies. But critics of the Government will argue that it could have raised the bankruptcy threshold instead.
Justice Minister Helen Grant told The Independent: "People having to sell their house to pay off debt should always be a last resort. We want it to stay that way and our changes will ensure that even fewer people have to sell their homes. Of the 90,000 charging orders issued each year only 0.5 per cent end in people having to sell their assets."
Although he is concerned about the £1,000 level, StepChange's Peter Tutton hopes that regulators might take action. "Will the regulators tighten up the criteria?" he asks. For instance, the Office of Fair Trading has acted over the misuse of charging orders against NatWest, its parent Royal Bank of Scotland, Alliance & Leicester, American Express and the HSBC subsidiary HFC.
Some of these had been using charging orders on sums close to £1,000. In its statement on NatWest and RBS, the OFT said it had found evidence that the banks "were not always taking account of customers' efforts to repay debts using a debt repayment plan or other method, and that many charging orders were used to secure relatively small amounts of debt, sometimes below £5,000".
These two banks would be unlikely now to go for charging orders under a £5,000 level as the OFT states in its communication to them that it could revoke their consumer credit licences if they do not take into account the size of the debt. However, it can take a while for the OFT to find out what individual lenders are doing – and in that time many people may have gone through considerable anguish or even lost their homes. (The lender in our case study, for instance, has not yet been reprimanded by the OFT.)
Moreover, a reorganisation of rules is taking place over the next year as the OFT is replaced by the Financial Conduct Authority in the regulation of consumer lending. The OFT and the new regulator may be temporarily distracted from some of their functions as they manage the transition between them.
Compliance expert Adam Samuel believes that the OFT has done too little in defending consumers. He says: "What the OFT should be doing is ordering the lifting of these orders and a proper investigation into the overall handling by this bank of its consumer finance debt. If this was a regulated mortgage contract, we would be looking at a fine and compensation for customers who may have been the subject of inappropriate attempts to enforce the loans concerned. Usually, in my experience, where there is an arrears handling problem there is also an irresponsible lending problem."
Many people might have a charging order on their home without realising its implications. Over 860,000 of them have been granted since the start of 2008. Only about 10 per cent of CCJs get cancelled after they are issued, which means that over 700,000 households are still living under a charging order. Courts allow the charging order to be granted in 85 per cent of cases, according to the Ministry of Justice.
Often the court hearing is held near the creditor's head office and hundreds of miles away from the debtor. But debtors, when they get notice of proceedings against them, can ask for the hearing to be moved to their local county court. If they ask for help from one of the free advice agencies (such as Citizens Advice, Christians Against Poverty, National Debtline or StepChange) they may be able to stop the order being granted. The problem is far better tackled at this early stage rather than letting an order go ahead and then trying to respond when the creditor asks a court to force a sale of the home.
Nearly a third – 31 per cent – of clients at Christians Against Poverty are homeowners. They need to avoid getting a CCJ against them for £1,000 or more in order to escape the fear that comes from knowing that you could lose your house.