COLLECTIONS

CCR
Are your charging orders worth waiting on? What to ask your DCA Look-a-like collection letters Effective debt collection US debt purchase warning
In association with

he growth in personal debt, together with property prices, has meant that charging orders have become a popular debt recovery tool. A creditor obtains a judgment against a debtor and then a charging order on the debtors property. A number of creditors, particularly in the finance and debt purchase sectors, having converted an unsecured debt to one with some security, sit back and wait for the debtor to pay the debt off as and when the debtor tries to sell the property. Unfortunately, sitting back and waiting for payment carries a number of risks: A mortgagee with an earlier charge on the property might repossess and sell the property at a time when there is insufficient equity in the property to pay all or even part of the debt to the creditor. Property prices might go down, wiping out any equity in the property. If the original judgment does not attract interest as could be the case for debts less than 5,000 or given in proceedings relating to the Consumer Credit Act 1974 the value of the debt will be eroded over time by inflation. Some creditors will perhaps apply for an order to sell the property rather than wait and take the risks. However there is another, more fundamental, risk which creditors are beginning to come across in respect of charging orders obtained after April 2003. Where a debtor owns property with another person, for example husband and wife, the debtor and the other person can, despite the charging order, easily sell the property and pay nothing to the creditor. Before April 2003 Once a charging order was obtained against a debtor over his interest in a property, whether he owned it solely or jointly, the charging order was registered

as a caution at the Land Registry. This meant that the creditor or his solicitors would get 14 days notice from the Land Registry that the debtor and other owner or owners were trying to get rid of the caution, probably with the aim of selling the property. The fact that such notice had to be given meant that a debtor knew he could not sell the property before the creditor knew about it and took steps to prevent the sale. So the debtor would usually pay the creditor before selling the property. Cautions which were registered prior to April 2003 still remain effective and the creditor will get 14 days notice of any attempt to get rid of the caution. April 2003 and afterwards The Land Registration Act 2002 (LRA) and Land Registration Rules 2003 (LRR) introduced significant changes to land registration procedures. Cautions were no longer to be used. Instead when a creditor obtained a charging order against a debtor: If the property was solely owned by the debtor, or all owners of the property were debtors, for example husband and wife owning the property jointly and being joint debtors, then an agreed notice was to be filed at the Land Registry by the creditor. Effectively this was almost as good as having a mortgage. The debtor could not realistically sell the property without repaying the debt to the creditor. However, if the property was jointly owned by the debtor with other nondebtors, for example husband and wife owning the property and only one of them being the actual debtor, the creditor was not entitled to enter an agreed notice. Instead the creditor could only file a restriction at the Land Registry in the following terms: No disposition of the registered estate is to be registered

without a certificate signed by the applicant for registration or his conveyancer that written notice of the disposition was given to [creditor...] being the person with the benefit of an interim/final charging order on the beneficial interest of [name of... debtor]. This restriction was, and remains, practically useless. The effect of the restriction The debtor and his joint owners freedom to sell the property is not affected by such a restriction. They could sell the property as if there was no charging order against the debtor. All that was required was that the new buyers or their solicitor write to the creditor informing them that they now owned the property and then confirm to the Land Registry that they had given that notice. Then the buyers could register the property with no further complications. The creditor, who is sitting back, waiting to get paid, instead just receives a letter confirming that a sale has already taken place, typically a week or two after the sale so there is little they can do to get the debt paid. In theory the creditor could apply for a freezing order against the debtor to try and obtain the cash from the sale proceeds. However, most creditors will never make such an application: The cost of applying for such a freezing order would run into thousands of pounds. The debtor might have spent the cash from the sale of the property before the freezing order was obtained so there is little, if anything, for the freezing order to bite on. An effective restriction A restriction worded as follows would provide a creditor with sufficient

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COLLECTIONS

CCR

WHEN IS A CHARGE NOT A CHARGE?

protection: No disposition of the registered estate is to be completed by registration without a certificate signed by [name the creditor with the benefit of the charging order and their address], being the person with the benefit of an interim/final charging order on the beneficial interest of [name of judgment debtor], or his solicitor that he was given written notice of the disposition at least 14 days prior to the disposition or without an order of the court which granted the interim/final charging order. If the wording suggested above were to be allowed, a creditor would have the right to be notified before a sale. The fact that such notice has to be given would mean that a debtor will know he cannot sell the property before the creditor finds out about the potential sale and of course takes steps to prevent the sale until the debt is paid. So the debtor will pay the creditor before selling the property. Perhaps at some stage, the LRA will be amended to allow such an effectively worded restriction. In the meantime, a creditor which obtains a charging order against a debtor who owns property jointly could try to persuade the Land Registry to allow the more effectively worded restriction set out above. If that attempt fails then the creditor could apply to the court for an order

Charging orders on property made since April 2003 may well be useless, following on from changes to Land Registry procedures allowing debtors to sell their houses without paying anything to their creditors By Sadak Miah and James Britton
that the Land Registry must allow that wording. Application to the Land Registry The Land Registry may approve an application to allow a restriction in non-standard wording if it appears: That the terms of the proposed restriction are reasonable, and That applying the proposed restriction would be straightforward, and not place an unreasonable burden on him. In our view, the Land Registry should allow a restriction which actually gives some protection to creditors. However, we have yet to make such an application and suspect that the Land Registry will not readily allow such non-standard wording. Applications to the court If the Land Registry refuses to allow a non-standard word restriction, then a creditor may wish to consider making an application to the court. Inevitably there are risks with this: Creditors should bear in mind that if the application is unsuccessful then they will have wasted the costs of making the application. So far as we can ascertain, an application along the lines suggested has not yet been made. A court may adopt a restrictive view and state that a creditor may have nothing other than the standard-worded restriction set out in the LRA. Conclusion The current protection afforded to creditors who have a charging order on property owned jointly by a debtor with others is useless. Unless the creditor can persuade the Land Registry or the courts to allow a more effectively worded restriction, the creditor must look at other ways of recovering the debt. CCR Sadak Miah is a partner at solicitors Blake Lapthorn Linnell; James Britton is a barrister practicing from 2KBW E-mail: Sadak.Miah@bllaw.co.uk E-mail: james.r.britton@btinternet.com

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