£1,000 debt could force you to sell your home
New rules let lenders use property equity to get cash says Neasa MacErlean.
Friday 05 April 2013
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.
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...
£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens