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Are unsecured debts really 'unsecured'?

Posted in 'Dealing with Debt' by Barry Stamp

12 December 2011

It's one year on since we reported that the Office of Fair Trading (OFT) reacted strongly to the growing trend of lenders forcing consumers to sell their homes in order to pay fairly small unsecured debts. But not much seems to have come from this.

According the the quarterly statistics published by the Ministry of Justice, the average number of charging orders per quarter in 2011 is 22,747 - not that much removed from the 2010 average of 23,405.

Four lenders - Alliance & Leicester, HFC Bank, American Express and Welcome Finance - were singled out for criticism of their use of charging orders and told to change their business practices.

Many people believe that ‘unsecured’ forms of borrowing – such as personal loans and credit cards – mean that if the worst comes to the worst and they are no longer able to keep up with repayments, then any property they own is safe from possession.

This isn’t always the case.

If attempts to obtain repayment of debt following the granting of a county court judgment are unsuccessful, lenders can then apply to the court for something called a charging order over any specific property owned by the debtor. This could include a house, land, or even stocks and shares.

A charging order does not give the lender the right to force a sale of a property. Lenders who have charging orders can simply sit back and wait for when the property is sold, and then get repayment, and interest, from the net sale proceeds. The debts already secured against the property, before the court granted the charging order, such as a mortgage, are taken first.

The number of charging orders granted in the UK has soared in recent years, rising from 45,000 in 2005 to around 165,000 this year. Lenders with a charging order are able to apply to the courts to force the sale of a property, but this is rarely sought in practice.

Charging orders are not a new concept, and the OFT acknowledges that lenders are entitled by law to use them, but following its investigation, has warned them that they must be used proportionately to the situation.

The OFT found that the four banks named fell short in a number of areas, including not taking into account individual circumstances, in respect of the level of charges added to accounts, and in some cases using misleading correspondence. In some cases, charging orders were applied for in relation to debts of just £600.

All four companies named in the report cooperated fully and have since made changes to the areas of their business that drew criticism.

If you are struggling with debts – big or small, secured or unsecured – and need some help, you can get free, impartial information in our Debt Advice Centre.

We'll be keeping an eye on the trend of Charging Orders. We're hoping that the OFT will be too.

Barry Stamp

Barry is a Chartered Banker and a Fellow of the Institute of Credit Management. He has a degree in Statistics and Business Economics from the Open University. Barry writes mostly on news from the worlds of banking and mortgages.

Barry is a co-founder of checkmyfile.

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