October 2, 2006
We're probably all familiar with the line "Your home may be at risk if you do not keep up with the repayments" which applies to debts secured against your home. A mortgage is just one example of a secured debt -- it prevents you from selling your home without paying back what is owed and the lender can force the sale of your property if you fall behind with repayments. It's why The Motley Fool favours unsecured loans because then you're not risking losing the roof over your head.
However, there is one way that a creditor can turn an unsecured loan into a secured one and it's by using a Charging Order. Be warned that creditors are increasingly using these as a means of getting their money back if you default on a loan!
It works like this: Once a creditor has secured a County Court Judgment against you, they can apply for a Charging Order as a means of enforcing the debt. At the moment creditors are not allowed to ask for a Charging Order if you have already agreed with the court to repay the debt by instalments and you are not in arrears, but the law is expected to change soon, enabling creditors to obtain an order even if you haven't fallen behind with your payments.
Nevertheless, if a Charging Order is granted the first thing that will happen is that a note will be entered on your property details at the Land Registry flagging up a restriction on your power to sell or remortgage the property.
If the creditor is then happy to sit back and wait for his money, nothing further will happen until you try to sell up, at which point any equity realised in the property will be used to pay back any loans secured against the property.
But, if the creditor wants his money immediately after acquiring a Charging Order, he can then apply to the court for an Order for Sale. If granted then the procedure works just as if you were having your home repossessed - the house will be sold, the creditor gets his money and you're homeless.
There's no guarantee that the court will grant an immediate Order for Sale -- occasionally the judge may think that, as the loan is secured against the property, the creditor can simply wait for his money, especially if you are then in a position to pay the money back in instalments. It would be more usual for you to be given some time to raise the money, perhaps by selling the property yourself rather than it being repossessed.
A Charging Order can be used against other assets too, not just your home. Any land or investments could be at risk too but the essence of a Charging Order is simply that a creditor can turn an unsecured debt into a secured debt.