Best practice use of charging orders
Earlier this year, a report from the Citizens Advice Bureau suggested how some creditors are using charging orders as a business practice to encourage vulnerable debtors to pay more than they can reasonably afford. In addition, given the rise in the number of charging orders raised, the CAB claims that some creditors are obtaining charging orders more easily due to unclear legislation and lack of financial thresholds. As a result, there has been much industry debate on the use of charging orders in the debt recovery process and the proposed changes and restrictions that the government has talked about introducing. These include a minimum debt amount threshold and additional legislation removing District Judge discretion. As a DCA, we most definitely do not use charging orders as an intimidation tactic for debtors, however we do see them as an important and necessary enforcement tool.
Rather than a negative action, we use charging orders as a good long term way of securing the debt, not purely as a step that has to be taken before requesting an "order for sale" - the vast majority of charging orders are not enforced in this way. Used correctly, they should only be used to secure a creditor's interest in the hope that mid term they will either sell or re mortgage the property at which point the creditor should be paid. However some companies may segment debts as "homeowner", raise a charging order and them sell them on. Some clients don't want to talk about payment arrangements initially but want to secure the debt first and then talk payment arrangements.
Before progressing to the stage of applying for a charging order, there are some things that need to be considered;
- size of the debt - if the debt is too small (eg under £2,500) then the process may be too costly.
- number of prior chargeholders - ideally you don't want more than 1 or 2 prior chargeholders as there is low possibility of gaining anything should the property be resold or remortgaged.
- approximate value of the property - need to ensure the value of the house is enough to ensure debts would be covered.
- equity - you need to consider if the debtor has any equity in the property.
- location - sometimes the area of where the property is needs to be considered to ensure the house would sell if appropriate.
- cost of the process - you need to take into account charging order fees and other associated court costs.
An economic decision as well
Costs also need to be factored into the decision - charging order court fees have increased and there are other associated court costs to take into account. It's not that litigation is becoming an expensive option but we do believe that it should be up to the creditors to make sure that they are better informed. If litigation were a cheap option then everybody would have a "punt". But now there's a real cost attached to the process and so it's more important than ever that creditors ensure they have good quality, up to date information on their debtor's circumstances. In an ideal world they would collect all the relevant information at the beginning of the business relationship in terms of finding out who they really are doing business with.
What impact would the proposed changes have on DCAs?
With regards to the proposal to introduce minimum financial limits, there is some concern that it could encourage debtors to spread their debts out across multiple creditors under the threshold amount. However, the majority of responsible DCAs should already have their own internal financial limits set to ensure they make a sound business decision.
In terms of restricting the discretion of the District Judges, we see this as a positive move. It will give clarity and consistency over the process. Currently two different District Judges in the same County Court may have different views, which means there's no consistency in County Courts and at the moment there is very little right of appeal against decisions based on the exercise of a District Judge's decision.
In summary, charging orders, when used appropriately and when creditors/ DCAs have made a decision taking all the above considerations into account, are an important tool in the debt recovery process. It's really up to the credit industry to use them responsibly so they have the desired effect - of securing high value debt where there is little likelihood of it being repaid in a short amount of time.
