Anyone with debts knows about the threats of bankruptcy and repossession – but there is another powerful legal weapon which creditors are using far more frequently in this recession. More than 200,000 families are now thought to be subject to a "charging order" on their home – putting them only one step away from being forced to sell the property in order to pay off credit card or other debts.
The Robinsons (not their real name) are one such family. Mother, father and five children almost lost their home this year after a debt-purchase company bought a £6,900 store-card debt of Mr Robinson's. The company got a charging order put on the family's house last November. This meant it could apply to a court for an "order for sale" on their home: the property would then be sold, and the proceeds used to settle the debt.
The company took this step after Mr Robinson lost his job and was unable to keep up the £50-a-month repayments he had agreed to. Facing homelessness, the family was saved by its local Citizens Advice Bureau. The CAB commented afterwards that the root cause of the Robinsons' problem "was ineffective safeguards to stop charging orders and orders for sale from being routinely granted, particularly for relatively small debts".
Citizens Advice, Which?, National Debtline, the Money Advice Trust and the Consumer Credit Counselling Service are among the groups which are alarmed at the surge in the use of charging orders. The Office of Fair Trading is now investigating industry practices.
"The increase has been spectacular," says Peter Tutton, debt policy officer at CAB, commenting on the ten-fold rise seen in the granting of charging orders between 2000 and 2007, during which period they rose from 9,700 to 97,000 a year. Although advisers working in the field believe the numbers continue to go up markedly, the latest official figures relate only to 2007 – so no one knows for sure.
When approached by The Independent, the Ministry of Justice said it was unable to give an update. But if charging orders continue to rise at the 39 per cent rate they averaged between 2000 and 2007, then they would have topped 134,000 in 2008 and would hit 185,000 this year. Assuming no annual increase at all since 2007, the most cautious calculations, based on official figures, would suggest that at least 200,000 homes are now subject to these orders.
"You are so vulnerable if you have equity," says Marsha Healy, debt adviser at Manchester CAB. "It can almost be a bad thing." In a typical case, creditors of unsecured debts (such as credit card or unsecured loans) start by taking a debtor to court if he or she fails to meet agreed debt repayments. As a result of such proceedings, over 827,000 so-called County Court Judgements were awarded against debtors in 2008.
If the debtor defaults after this judgement, creditors can apply for a charging order. A few years ago, only one or two creditors did this; now, says Healy, "it's right across the board". High-street banks, utilities and the Government (in the form of the Child Support Agency) are among the users of charging orders.
Judges decide whether to grant these orders or not. In the past they rarely did; now they do. Debts usually amount to £7,000 but CABs are regularly dealing with sums below £3,000. One CAB adviser, when successfully challenging a charging order for a £2,400 debt recently, saw two creditor companies at court with, between them, "over 500 charging order applications listed for hearing that day, but only five defendants had turned up for the hearing". The vast majority of the 495 undefended applications would, almost undoubtedly, have gone through. "Judges think the creditor has a right to secure the debt," says Healy.
If there is equity in the property, the creditor may then apply for an order for sale of the house. The Ministry of Justice does not centrally record how many of these orders are issued (although it is about to start doing so) – but CAB thinks it is unlikely to be much more than 1,000 a year at the moment.
However, Tutton fears that it could take little for numbers to soar. "It now looks like more creditors have got a policy of going for orders for sale," he says. And they could find that judges become more sympathetic to their case. "There is a presumption in case law that creditors should not be kept out of the money," he adds.
The British Bankers' Association accepts that there has been an increase in charging orders. "A charging order is a last resort for the bank," says spokeswoman Lesley McLeod. "The ultimate legal consequence could be that the house could be repossessed." But lenders "are taking every conceivable step to prevent people's homes being repossessed", she adds, and in most cases the order is held in place until the homeowner decides for their own reasons to sell the house. Northern Rock, now in public ownership, admits that it has been accused by advice agencies of using charging orders more than other banks.
"We do use them in certain circumstances," says spokeswoman Jaqualyn Gill. Asked if the bank has applied for orders for sale, she says: "It may have happened in some cases." She insists that Northern Rock would do everything else it could do first to work with the customer to achieve a mutually acceptable repayment arrangement.
We could now, however, be seeing the calm before the storm on orders for sale across the sector. "There is very little evidence that lenders are pressing for sales," says Frances Walker of the Consumer Credit Counselling Service. "This is likely to remain so in a falling housing market." But, as Walker's comments imply, the situation could change when house prices start rising again and there is more equity in properties.
"I can see the situation getting worse," says Healy, commenting on what might happen if property prices rise. There is no point in creditors applying to have a property sold if there is not enough equity in the home to repay any mortgage and any debt secured on it.
Carl Williams, debt specialist at solicitors Pannone, says that financial institutions examine Land Registry records to see how long a property has been owned and what the mortgage is on it.
They can then calculate fairly easily how much equity is available. Many estate agents are now saying that there are signs of the property market picking up. Mark Hunter of Grice & Hunter in south Yorkshire is one of these. But in today's still fragile market, he thinks that the existence of a charging order on a property could dampen demand: "In a cautious market, the slightest thing can put people off."
The Government is being urged to act. Last month it backtracked on a move that would have allowed charging orders to be made even without a debt default.
The Government is now under pressure to go further. The Consumer Credit Counselling Service claims that charging orders also distort the lending market – turning non-secured debt into secured debt but continuing to charge interest at the higher rates of unsecured debt. Which? is worried that irresponsible lending is made easier if those lenders potentially have recourse to people's homes.
CAB believes that charging orders can be used to bully debtors. Tutton says: "Creditors are using them as a threat to extract more money from people. The growth of charging orders is a decline in standards of willingness to give debtors time and space to deal with their debts."
Charging orders: The facts
Never ignore letters about charging orders. You can write a letter of objection, and you must attend the hearing that takes place if you want the order to be rejected. Possible defences, according to the Consumer Credit Counselling Service, are that there is no equity in the property, it is jointly owned or that you are considering bankruptcy (so a charging order would give the creditor applying for the order an unfair advantage over others).
The order is given in two parts. An interim order is often made without a hearing. The debtor then gets a letter giving them a minimum of seven days' notice of the hearing at which the order could be made final and permanent. At this stage, you must write a letter of objection, which you should send by registered mail. That will include the kind of arguments mentioned above. You also should attend the hearing which will usually take place in private before a District Judge.
Proceedings and defences are complicated, however. You need specialist advice. It is often necessary to apply to get the hearing heard at the court near you (as they can be scheduled in other locations).
If you get an order against you, you can have it removed if you pay off the debt. If your creditor subsequently applies for an order for sale, you again need immediate, specialist advice. Defences are similar to those for charging orders. Your circumstances can be taken into account to some degree – particularly if an elderly person or dependent children live in the house.
For more information, see the National Debtline factsheet, "Charging Orders in the County Court", on www.nationaldebtline.co.uk or call 0808 800 4000.