Debt enforcement against the deb

							                   Debt enforcement against the debtor’s home –
                   legal charging orders
                   Standard Note:    SN/HA/5248
                   Last updated:     10 December 2009
                   Author:           Lorraine Conway
                   Section           Home Affairs Section



Creditors can begin proceedings in court to recover payment of unsecured debts. If a creditor
is successful and obtains a court judgment in their favour, the next step to recover payment
of the debt is to enforce the judgment. There are various debt enforcement methods open to
a creditor such as a garnishee order, a warrant of execution, or an attachment of earnings
order. Each method has its own particular strengths and weaknesses and the right method of
debt enforcement for the creditor will depend in large part on what assets the debtor owns
and his/her income. However, for creditors dealing with unsecured consumer debts, charging
orders are increasingly being used as a method of enforcement.

A charging order is an order of the court placing a legal charge on the judgment debtor’s
property (usually his home) for monies owed to the creditor. A legal charge means that if the
property is sold, the full amount of the charge (i.e. the outstanding debt) has to be paid
before any of the proceeds of the sale can pass to the judgment debtor. If there are a
number of charges on the property they will take priority according to the date that the
charges were registered with the Land Registry. It is important to note that a charging order
does not in itself compel the judgment debtor to sell the property. To force the sale of the
debtor’s home, the creditor in possession of a charging order would need to apply to the
court for an order for sale of the charged property. It would be for the court to decide whether
or not to make such an order taking into account all relevant circumstances.

An order for sale would force the sale of the charged property (the debtor’s home) and the
proceeds of sale would be used to pay off the creditor (after other secured loans ranking in
priority have been paid). Any equity remaining in the property would then pass to the debtor.

This note outlines the making and enforcing of legal charging orders against the debtor’s
home.




This information is provided to Members of Parliament in support of their parliamentary duties
and is not intended to address the specific circumstances of any particular individual. It should
not be relied upon as being up to date; the law or policies may have changed since it was last
updated; and it should not be relied upon as legal or professional advice or as a substitute for
it. A suitably qualified professional should be consulted if specific advice or information is
required.

This information is provided subject to our general terms and conditions which are available
online or may be provided on request in hard copy. Authors are available to discuss the
content of this briefing with Members and their staff, but not with the general public.
Contents

1      What is debt enforcement?                                                                  2 

2      What are charging orders and orders for sale?                                              3 

3      When can the creditor apply for a charging order?                                          3 

4      Enforcing a charging order                                                                 3 

5      Reform of charging orders under the TCEA 2007                                              4 
       5.1  Background consultation- ‘Effective Enforcement White Paper’                          4 
       5.2  Part 4 of the Tribunals Courts and Enforcement Act 2007 – not implemented             4 
       5.3  Written Ministerial Statement - Part 4 of the TCEA 2007                               5 

6      Citizens Advice Bureau concern about the use of charging orders                            5 

7      Office of Fair Trading review into the use of charging orders                              6 




1       What is debt enforcement?
If a court, having considered all the evidence of a case, decides that a debt is properly owed
to the claimant (i.e. the creditor), it will make a judgment order against the defendant (i.e. the
debtor). In legal terms, the claimant is said to have ‘obtained judgment against the
defendant’). If the defendant still does not pay the debt in full, the next step is for the creditor
to enforce the judgment order. The court will not enforce a judgment order unless it is
specifically asked to do so.

There are various debt enforcement methods open to a creditor including:

     • a garnishee order (this method would only be an option if the debtor is owed money
       by a third party, in which case the court could order that the third party pay that
       money directly to the creditor instead, to pay off the debt owed to him/her);

     • a warrant of execution (this is a request for the court bailiffs to enter the debtor’s home
       or business premises to seize the debtor’s personal belongings to sell and pay off the
       debt);

     • an attachment of earnings order (where the debtor’s employer is ordered by the court
       to deduct a certain amount of money from the debtor’s wages each week or month in
       order to repay the debt); and

     • a third party debt order (this is where the court makes an order to freeze the debtor’s
       money that is held, for example, in a bank account, so that it cannot be used by the
       debtor until he pays the outstanding debt).

Each debt enforcement method has its own particular strengths and weaknesses. The right
method for the creditor to pursue will depend on what assets the debtor owns and the
debtor’s income. However, for those creditors attempting to recover payment of an




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unsecured consumer debt, charging orders are increasingly being used as a method of
enforcement. The rest of this note is only concerned with charging orders.

2         What are charging orders and orders for sale?

In a nutshell, a charging order is a means of debt enforcement; it turns an unsecured debt
into a secured one. A charging order is an order of the court placing a legal charge on the
judgment debtor’s property (usually the debtor’s home) for monies owed to the creditor.
Charging orders can only be granted in respect of judgment debts, where a court (the High
Court or a County court) has already held that a debt is legally owed and payment is due.

If there are a number of charges on a property they will take priority according to the date
that the charges were registered with the Land Registry. If the property subject to a charging
order is sold, the full amount of the charge (i.e. the outstanding debt) has to be paid before
any of the proceeds of the sale can pass to the judgment debtor.

It should be noted that a charging order does not in itself give the creditor an immediate right
to take possession of the debtor’s home. However, once an order is in place, a creditor can
subsequently apply to the court seeking an order for sale of the charged property. An order
for sale would force the sale of the debtor’s home (i.e. the property subject to the charging
order) in order to pay the creditor off.

3         When can the creditor apply for a charging order?
As outlined above, charging orders can only be granted in respect of judgment debts, where
a court has already held that a debt is legally owed and payment is due. The creditor can
apply for a charging order at any time after they have obtained judgment from the court.
However, the court will only make the necessary order in circumstances where the judgment
debtor has:

      • failed to pay the amount of the judgment when it was due; or
      • failed to pay one or more of the instalments due under the terms of the judgment


The court can make a charging order absolute or subject to conditions.

Following the 2001 case of ‘ Ropaigealach v Allied Irish Bank plc, section 1 of the Charging
Orders Act 1979 (COA 1979) is interpreted by the courts as meaning that where a court has
allowed a debtor to a judgment debt to pay by instalments, a charging order can only be
made where the debtor has fallen behind with those instalments. 1

There is currently no minimum financial threshold below which a judgment creditor would not
be able to apply for a charging order. (Further detailed information on this point is provided in
paragraph 5 below).

4         Enforcing a charging order
A charging order does not in itself give the creditor an immediate right to take possession of
the debtor’s home; the order is normally viewed as security for a debt, not satisfaction of it.
The creditor can still pursue other methods of enforcing the judgment. In practice, once a
charging order has been registered against the debtor’s property, it is not unusual for the


1
    Ropaigealach v Allied Irish Bank plc [2001] EWCA civ 1790



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creditor to simply leave it in place whilst he pursues another course of enforcement action,
such as entering into a repayment agreement.

That said there are circumstances where a creditor in possession of a charging order will
immediately apply to the court for an order for sale of the charged property. An order for sale
would force the sale of the charged property and the proceeds of sale would be used to pay
off the creditor (after other secured loans ranking in priority have been paid).

Both the COA 1979 and section 71(2) of the County Court Act 1984 (CCA 1984) give the
court wide discretion to refuse an order for sale or suspend it on terms that the debtor repays
the debt by instalments. Guidance on the Civil Procedure Rules advises judges that ordering
the sale of a property is ‘an extreme sanction’ and all circumstances would have to be
considered. However, paragraph 73.10.1 of the guidance also states that sale of the debtor’s
home is likely to be ordered in “a case of the judgment debtor’s contumelious neglect or
refusal to pay or in a case where in reality without a sale the judgment debt will not be paid.” 2

5         Reform of charging orders under the TCEA 2007
5.1       Background consultation- ‘Effective Enforcement White Paper’
In 2003, the Lord Chancellors Department (now Ministry of Justice) published the ‘Effective
Enforcement White Paper’, in which it set out its proposals for reform of enforcement law. 3
The proposals included changes to the COA 1979 governing the enforcement of judgment
debts by charging orders and orders for sale. One of the proposals was to allow creditors to
obtain a charging order even though the debtor was repaying the debt by instalments. The
other was to establish a provision for secondary legislation to introduce safeguards for
debtors on both charging orders and orders for sale.


In this White Paper, the Government stated that these reforms were necessary because the
current law allowed debtors with large judgment debts to repay these debts in small
instalments, without providing the creditor with the security that the whole debt could be paid
off if the debtor’s property was sold. The fact that charging orders could not be made unless
the debtor was in arrears with payments due under an instalment order, was perceived as
offering opportunities for the debtor to dispose of valuable property while making modest
instalments in the short term. 4

The ‘Effective Enforcement White Paper’ can be viewed in full at:

http://www.dca.gov.uk/enforcement/wp/chapter4.htm#sec2

5.2       Part 4 of the Tribunals Courts and Enforcement Act 2007 – not implemented
These proposals are contained in Part 4 of the Tribunals Courts and Enforcement Act 2007
(the ’TCEA 2007’).

Specifically, section 93 of the TCEA 2007 amends the COA 1979 to enable charging orders
to be made by the court even though the debtor is not in arrears of an order for payment of
the debt by instalments. However, subsection 3 prevents the court from making an order for
sale of the property unless the debtor has defaulted in making any payment due under an



2
    Supreme Court Practice – guidance on Civil Procedure Rules
3
4




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instalment order. It also enables rules of court to specify limitations upon enforcement of a
charging order after there has been default under an instalments order.

As a further safeguard, section 94 of the TCEA 2007 inserts a new section 3A into the COA
1979 to provide a power for the Lord Chancellor to specify in regulations financial thresholds
below which a court cannot make a charging order and/or an order for sale. This provision
was deemed necessary in order to ensure that charging orders are not used to secure
payment of disproportionately small judgment debts.

Sections 95 to 105 of the TCEA 2007 establish a system of ‘applications for information’,
whereby a creditor can apply to the court for an order to obtain information about the debtor's
means from the Department for Work and Pensions, HM Revenue and Customs, and third
parties such as banks and credit reference agencies.

Sections 93 to 105 of the TCEA 2007 can be viewed in full at:
http://www.opsi.gov.uk/acts/acts2007/ukpga_20070015_en_1

5.3     Written Ministerial Statement - Part 4 of the TCEA 2007
On 17 March 2009, Bridget Prentice MP, Parliamentary Under-secretary of State, Ministry of
Justice, announced in a written Ministerial Statement that following a comprehensive
reassessment of the provisions in the TCEA 2007 the Government would not be
implementing Part 4 of the Act, including sections 93 and 94. 5 This means that there is
currently no minimum financial threshold for obtaining a charging order.

6       Citizens Advice Bureau concern about the use of charging orders
In June 2009, the Citizens Advice Bureau (CAB) published an evidence briefing, entitled “Out
of order – CAB evidence on the use of charging orders and orders for sale in debt collection”.
In this briefing, the CAB said that the law on charging orders is unclear and warned that
creditors were obtaining charging orders with increasing ease. The CAB also expressed
concern that there is currently no minimum financial threshold for obtaining a charging order,
leaving people at risk of losing their homes over potentially very small sums of money.
Quoting from Ministry of Justice judicial statistics, the CAB stated that since 2000 there has
been a 722 per cent increase in the number of charging order applications by unsecured
creditors, around 74 per cent of the 132,000 applications in 2007 resulted in charging orders
being made. Commenting on the position, David Harker, Citizens Advice Chief Executive,
has said:

        The law as it stands leaves debtors far too exposed to unfair treatment and the risk of
        losing their homes from unsecured creditors. Some creditors are using the court
        process as a tactic to intimidate vulnerable debtors into paying unaffordable amounts.
        This is not only unfair to the individuals concerned who have offered payments towards
        their debts but is also unfair to other creditors.”

        The charity welcomes the Office of Fair Trading review into the use of charging orders
        but is now calling on the Ministry of Justice to look at the law and restrict access to
        enforcement when debtors are doing all they can.

The CAB called on the Government to implement the debt management provisions of the
TCEA 2007 to restrict the creditors’ rights to enforcement action and so enable debtors to
make affordable repayments to their creditors which are binding. 6

5
     HC Deb 17 march 2009 c46-47Ws, available at:
    http://services.parliament.uk/hansard/Lords/ByDate/20090317/writtenministerialstatements/part007.html
6
  http://www.citizensadvice.org.uk/press_20090625



                                                       5
The     CAB      evidence    briefing   document    can     be     viewed   in    full  at:
http://www.citizensadvice.org.uk/index/campaigns/social_policy/evidence_reports/er_consum
erandebt/out_of_order



7       Office of Fair Trading review into the use of charging orders
The Office of Fair Trading (OFT) has a statutory duty to protect the interests of consumers by
ensuring the fitness of those holding or applying for consumer credit licences. As a result of
the significant rise in the numbers of charging orders being granted by the court over the past
few years, the OFT has decided to monitor the use of charging orders as a method of
enforcing judgment debts. However, the OFT interest in this matter is limited to those
charging orders that are applied for and granted as a result of regulated consumer credit
agreements. It is not concerned with charging orders that relate to judgment debts not
connected to credit agreements.

In June 2009, the OFT said that the interim results of its review indicate that there may be
potential problems with the way in which some creditors use charging orders as part of their
debt enforcement activities. The OFT conformed that it would be working with licensees to
ensure that consumers are not the subject to unfair business practices in relation to the use
of charging orders and orders for sale. 7




7
    http://www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/orders




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