An Opportunity to Recover that Old Debt
Friday 6th February 2015
Between 2007 and 2011, creditors had difficulty recovering debt. At the start of the recession, credit lines, bank funding and, therefore, cash flow dried up almost overnight. Those businesses who provided services and goods on credit found themselves with a mountain of bad debt.
Usual enforcement steps were taken with bankruptcies/winding petitions and money claims both peaking between 2006 and 2008, since when there has been a steady decline in creditors taking court action. There are reasons for this but, generally, as the economy has improved, court action has reduced. Creditors have also become more savvy and tightened their trading terms.
As the ability to raise cash diminished, property prices remained relatively stable. After the 20 year continual increase in house prices, creditors turned to debtors’ properties with a view to at least securing the debt long term. The general view was perhaps ‘We can’t recover now, but the debtor owns a house with plenty of equity in it. Let’s secure our debt against that equity’. There was a steep increase in the number of charging order applications made. Between 2000 and 2005, 154,000 Charging Orders were made; between 2006 and 2010 there were 504,000. The latter half of the decade was a busy time for us; charging order applications were a daily occurrence.
So what is a charging order and how does it work?
You can apply for a charging order after judgment is entered against a debtor and the debtor fails to pay it. If the debtor owns a property, the creditor can apply to court for the charging order. If granted, the charging order secures the judgment debt against the property. The charge is only as good as the equity in the property however. If there is no equity then the charge is almost worthless. However, if there is equity in the property and the debtor later comes to sell the property or wants to re-mortgage, then the debtor would first have to pay off the charge as part of the sale or re-mortgage. The charging order therefore doesn’t guarantee payment, but gives the creditor the opportunity to recover in the future. Unlike judgments which only last for 6 years, the charging order lasts until it is removed. There is no long stop date.
With a charging order, a creditor can sit and wait or, potentially, apply for an order for sale, enforcing the charging order. This is very similar to a possession order that lenders might apply for when a borrower fails to pay the mortgage. Unlike charging order applications, which are common, applications for orders for sale are extremely rare. In 2013, 222 orders were made. They are rare because they are difficult to obtain and a draconian step, especially with smaller debts. Also, as the recession hit house prices outside the south east, creditors were nervous about the lack of equity in properties.
The tide is turning now, and we are seeing clients auditing old debts with a view to recovering some of them where charging orders have been obtained. Not only have property prices started to rise, resulting in more equity, but there is better access to finance meaning that, if managed correctly, debtors can be persuaded to re-mortgage to settle the debt. Additionally, the country’s employment figures are strong. The threat of an application for an order for sale can result in payment plans being agreed which weren’t possible back in 2006-08.
Applications for orders for sale are increasing in popularity and the courts are becoming more comfortable with granting orders for sale. We have seen an increase in the number of applications we are making and cash is being recovered, which our clients had previously written off.