Beware the house snatchers as lenders get tough on bad debt

Charities warn of a surge in 'charging orders', which attach unsecured loans to property. What can debtors do?

(OWEN HUMPHRIES / PA)

As the recession continues and job losses mount, the lengths lenders will go to in order to recover unsecured debts are increasing, exacerbating the already difficult situation for those in debt and, even, putting borrowers' homes at risk.

The Citizens Advice charity reported last week that the number of "charging orders" being taken out by credit-card, personal-loan and hire-purchase providers had surged.

A charging order is a county court order which secures a consumer credit debt against a property, converting it from an unsecured debt into a secured one. "When you have a charge on your property, it becomes a different status of debt. There is more at stake," says Beccy Boden Wilks, a spokeswoman for the charity National Debtline. Because the loan, no matter what its size, is now secured against your property, failure to repay it could potentially result in the loss of your home. However, "just because someone has applied for one or is threatening to get a charging order doesn't immediately mean you are going to lose your house," she says. "There is a legal process to go through."

The lenders, though, deny that they are scrambling to take out charging orders. Helen Saxon, a spokeswoman for the Finance and Leasing Association, says: "If anything, lenders are doing more in the credit crunch to help people who are in debt. What our members want is for people to repay and they are always open to negotiate. Charging orders are always going to be the last resort when all else has failed."

But the organisations at the sharp end, which are busy counselling those in debt trouble, don't agree that lenders are using charging orders as a "last resort". Peter Tutton, (right), a social policy officer for Citizens Advice, believes lenders are using them as means of ratcheting up the pressure on already hard-pressed consumers. "There is an inherent unfairness in creditors using charging orders. If someone is making an offer of repayment, using these orders to get them to pay more than they can afford constitutes a form of harassment."

Mr Tutton, is concerned that there is no minimum financial threshold for obtaining a charging order, leaving people at risk of losing their homes over very small sums of money.

In one instance, the charity reported that a woman in Wiltshire was threatened with a charging order over a debt of just £680. Other cases cited by the charity involve lenders telling debtors that they will go for a charging order as a negotiating tactic to try to force them to pay more of their debt off.

It's easy to see the cold logic behind charging orders. Generally, borrowers tend to prioritise debts secured against their property over unsecured ones, meaning that a lender with a charging order stands a better chance of getting their money first.

Being forced to sell your home is the worst-case scenario, but a charging order can have other detrimental effects in the short term. It will, for example, prevent borrowers from being able to remortgage in order to release equity to pay off their debts. "You're probably going to find it harder to remortgage your property," says Ms Boden Wilks, "because of the reduced amount of equity and because of the effect the order has on your credit rating as you have defaulted on the repayment requirement." Lending criteria are tighter than ever, making it difficult to remortgage if your credit record is squeaky clean, let alone if you have County Court Judgments against you.

There are several defences you can use against a charging order. If you own a property jointly and it is your partner's debts that would be secured against the house, you can petition the court not to put a charging order on the joint property. You can also argue that a charging order would unfairly prejudice one of your creditors over the others.

What's more, if you are in negative equity, your debt may not be covered by the value of your house, so you can argue that a charging order would be futile. Regardless of which defence you pursue, you must continue to offer to negotiate repayments. As Mr Tutton says: "If you are doing what you can, getting advice, paying what you can afford to on your debts, then you shouldn't suffer further enforcement action, costs and pressure."

If your defences fail and a charge is put on your property, you can request restrictions on it. These vary but, as an example, if you have young children, you can request that a lender not be allowed to pursue an order of sale until they reach a certain age, protecting you at least in the short term from losing your home. The same rules can apply if someone with a disability lives in the property.

You can also argue in court that instead of a charging order, an instalment order should be imposed. This is when the court decides that you should pay a certain amount of money each month towards your debts. If you agree to an instalment order, the charging order should be set aside, giving you breathing space.

If this doesn't work, the next stage following a charging order is an order of sale. This forces the debtor to sell their property in order to repay their debts secured against it by the charging order. Again, the key according to the debt charities is to continue to negotiate with the creditors to see if there is any way to head off the sale of the property. In such a scenario, it is best to seek the help of an adviser at one of the debt charities who can even negotiate on your behalf or at the very least advise you as to what to say and do next.

Charging orders are not the only tactics being used by unsecured lenders faced with mounting bad debts: "In these tough economic times, more people can't afford their repayments, so we are seeing a diversification in the enforcement of debts," Ms Boden Wilks said.

Popular tactics used include referring borrowers to debt-advice lines, some of which will charge them for the help. As a rule of thumb, people in debt trouble would be best sticking to free independent advice services such as Citizens Advice, National Debtline and the Consumer Credit Counselling Service.

Many creditors who want to cut their losses and recover as much of the debt as possible will sell on debts at a reduced price to debt-collection agencies. These agencies will then pursue you for the debt. However, the interest rate, cost of the debt and any other details should not change. The only exception is if it is written into the terms and conditions of your original agreement that in the event the debt is sold on, the new lender has the right to modify your contract. Changes to your contract may be unlikely, but the tactics used by your new lender could be more aggressive. According to Citizens Advice, many of the charging orders it is encountering are being brought by firms which buy up debts from mainstream lenders.

Other options available to creditors are applying for an order of information, a third-party debt order, or an attachment of earnings order.

The order of information obliges you to appear in court (if you do not, you will be held in contempt) and give information about the state of your finances. The aim is to discover if you have any funds with which to repay the debt and allow creditors to decide the best course of action to recover the money.

The third-party debt order is used to obtain funds from elsewhere if a lender discovers you have a savings pot or other available funds, including, in some cases, a pension.

An attachment of earnings order allows the creditor to draw your repayments directly from your salary. Lenders can also use a court order to instruct bailiffs. However, this is used less frequently than many assume as it is rarely a successful way of recovering debts due to laws preventing bailiffs gaining entry into properties.