Making people use their assets to pay unsecured debts is fine in theory, but when lenders put their homes at risk because of debts of less than £600, it just abuses the system.
When you take out unsecured credit, such as a credit card or personal loan, you’d be forgiven for thinking ‘unsecured’ means just that. After all, it’s not like a mortgage where your property is used to guarantee the loan.
So it might come as a shock to learn that lenders can apply to the courts for a charging order. This is a court order that places a ‘charge’ on a debtor’s property, turning unpaid, unsecured debts into secured debts.
This means that once any existing charges on the property have been settled, the debt must be paid back out of the proceeds of the house sale. A creditor who has obtained a charging order can even apply to the court for an order requiring the property to be sold sooner.
When charging orders work well
In theory, this sounds reasonable to me. If someone refuses to pay their credit card bill or their loan repayment, but has other assets such as a house or a car, it’s only fair that they should eventually be forced to use those assets to repay their debts.
The growth of the commercial debt management and Individual Voluntary Arrangement (IVA) industry has led to far too many people thinking they have the right to walk away from their unsecured debts without consequences.
The knock-on effect is twofold. First, those consumers who are genuinely struggling with debt find it even harder to get a sympathetic hearing from their lender. Meanwhile, responsible borrowers who only borrow what they can afford to repay are hit with higher interest rates to cover other people’s bad debts.
Lenders should use charging orders fairly
What isn’t fair, however, is when lenders use charging orders disproportionately or against consumers who are in genuine financial difficulty. The Office of Fair Trading (OFT) has uncovered instances of charging orders being used to secure debts of less than £600.
OFT’s findings show that consumers should never assume that their bank has its customers’ best interests at heart – they are commercial enterprises looking to make a profit.
That said, charging orders don’t happen overnight and don’t happen in a vacuum. Anybody who receives a letter from their lender threatening a charging order should seek professional debt advice as soon as possible to find the best solution to their money problems.
Banks have a responsibility to treat their customers fairly. But consumers have a responsibility to treat their bank, and other consumers, fairly too.