It is well reported that more and more people are unable to repay their debt and choosing to resolve the problem using formal debt solutions such as Individual Voluntary Arrangements (IVA).

Given expected cuts to public expenditure I expect that this situation is only going to get worse. The banks and credit card companies think this too, and they are becoming increasingly worried that money they have lent out will not be repaid.

Banks are reacting to the problem of non payment of unsecured debt by taking swift action to secure these debts against property where repayment problems occur. They can do this by applying for a charging order against a homeowner’s property. We explain how this can happen and the ways to prevent it.

What is a Charging Order?

If you are a home owner and you have an outstanding unsecured debt which remains unpaid it is possible for the person you owe money to, to apply to the court for a Charging Order. If granted this secures the debt against your house.

After a Charging Order is in place the creditor cannot automatically force you to sell your property. However interest of 8% a year will be legally added to the debt if it remains unpaid. When you eventually sell the house, the outstanding balance of the loan plus interest will be deducted from any equity you have.

A charging order therefore provides a kind of safety net for the bank ensuring that if you don’t pay your debt or even if you decide to do an individual voluntary arrangement (IVA), the full outstanding balance will eventually be paid.

CCJ issued first

The bank that you owe money too cannot simply decide to apply for a charging order out of the blue.  They must first have issued a county court judgement (CCJ) against. For this reason it is very important not to ignore warnings of a CCJ.

If you receive notice of a CCJ application, you must complete and return the admission form which gives the opportunity to outline your financial circumstances. You can also suggest a monthly payment amount that you can afford.

If you then maintain the payments as agreed, your creditor cannot take any further action against you and you are legally protected against the possibility of a charging order.

BMD Tip: The rules about when a Charging Order can be applied for have changed since this article was written. Now the creditor can apply immediately after a CCJ is issued by the Court whether you make the agreed payments towards the debt or not.

There are a number of arguments that you can use to try and prevent the Court granting a Charging Order. However if an order is made you should not panic. There is very little risk that you could be forced to sell your house. However statutory interest will be added to the debt so you should still make every effort to repay it.