OFT acts on irresponsible use of charging orders

27th November 2010  

A recent investigation by the Office of Fair Trading (OFT) has found issues with the way some lenders have been using Charging Orders to recover unpaid, unsecured debt. It will come as a shock to many to learn that Charging Orders can turn typically ‘unsecured’ debts like credit card balances and personal loans into ‘secured’ debt in the event of personal financial problems.

The OFT has ordered four UK lenders to change the way that they use Charging Orders. Alliance and Leicester Personal Finance Limited, American Express Services Europe Limited, HFC Bank Limited (part of the HSBC Group) and Welcome Financial Services Limited (part of Cattles plc) were all reprimanded and had requirements imposed on them relating to the way that they enforce consumer debts.

Charging Orders are Court Orders that place a ‘charge’ on a debtor’s property, turning unpaid, unsecured judgment debts into secured debts. The effect of Charging Orders are that once any prior charges on the property have been settled (like the mortgage used to purchase the property), the debt must be paid back out of the available proceeds of sale when the debtor sells the property.

If satisfactory progress isn’t made with regards to paying the debt, a credit card or loan company can also apply to the court for a Repossession Order forcing the property to be sold against the owners will, but this rarely happens. Charging orders are a legitimate way to secure and ultimately recoup unpaid debts, however, the investigation by the OFT found issues with the way some lenders use them.

The problems revealed by the OFT’s probe were specific to each business, but across the sector they include a failure to consider the customer’s circumstances before asking the court to put a charging order in place; not building adequate checks into the lender’s decision-making process; and also applying substantial charges for referring cases to a debt collection agency. In a small number of cases, lenders sent oppressive and/or misleading correspondence.

Ray Watson the OFT’s Director of Consumer Credit said

“Our investigation uncovered instances of Charging Orders being used to secure debts of less than £600. Lenders are entitled to use Charging Orders but must do so proportionately. Where we consider the use of Charging Orders to be unfair or oppressive we will take action to protect consumers”.

According to the OFT all four companies under scrutiny have cooperated fully with the OFT investigation, and have subsequently made procedural changes to the way they manage this area of their business. The OFT says that it’s working hard to ensure that the banking industry uses charging orders and other debt enforcement tools responsibly.

The OFT’s work highlights the unfortunate reality that your home can be at risk even if you don’t keep up payments on unsecured debts like credit cards and personal loans, not just on major loans like the mortgage used to purchase the property.

Anybody who receives notification from a lender threatening a Charging Order should seek professional debt advice as soon as possible.


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