For most people, the idea of losing your home is terrifying – but whether you rent or own; it’s a real possibility if you get into the most serious kind of financial difficulties.
Here, we’ll look at how debt can affect you and your home; what kind of rights you have, and the kind of extreme situations that could lead to you losing your home if your debts spiral out of control. We’ll also look at what a ‘charging order‘ is – a way that companies you owe money to can recover that money if you ever sell or remortgage your house.
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When could your home be at risk because of debts?
Before we get started exploring debts and your home, it’s important not to panic. Being kicked out of your house by a creditor (a company you owe money to) isn’t something that would ever come as a surprise – it’s a last resort, and you would always receive letters and calls giving you lots of opportunities to avoid it happening.
That said, ignoring letters and phone calls can make a creditor panic and speed the process up. So it’s crucial you know where you stand and what to do.
How debt could affect your home will depend a lot on whether you rent or have a mortgage on your house. We’ll explore both situations – as well as how debt solutions could potentially put your property at risk.
If you rent your home
Renting your home has some advantages and some disadvantages as far as debt goes.
Since you don’t own your home – creditors can’t use your property to force you to pay any money you owe. Of course, the only exception to this would be the landlord you rent from. A landlord could legally end your tenancy if you fall behind on your rent.
Most people who rent houses in the UK sign a ‘shorthold tenancy agreement’ – and after an initial 6-month period, a landlord usually only has to give you one month’s notice if they want you to leave.
Some landlords are very understanding and will come to an agreement with you if you fall behind with rent – but on the other hand; some landlords will consider ending your tenancy even if they think you might end up with money troubles.
If you rent your home and you’re struggling with money, it’s a very good idea to get debt advice as soon as possible. The sooner you deal with your debts, the less likely you are to end up falling behind with rent and risking losing your home.
If you're a homeowner with a mortgage
Most people who ‘own’ their home have a mortgage. Quite simply, this is a loan which is ‘secured’ against your home. When anything you owe is described as a ‘secured debt’ it really just means that it’s attached to something you own that can be taken away from you if you don’t keep up with payments.
Your home could be in danger if you miss payments
If you slip into arrears (on-going missed payments), your lender could start court action against you if you don’t come to an agreement about how you’ll catch up. This is called ‘possession action’ – and is the first step involved with taking your home off you – often called ‘repossession’.
There are very strict rules that lenders have to stick to during possession action. They must follow the Mortgage Conduct of Business (MCOB) rules from the Financial Conduct Authority (FCA).
These are long and complicated rules – but they make sure you’re treated fairly. There is a lot of work involved with repossessing a house, so your lender will usually work with you to come to an agreement that helps you pay off your debts and keeps you in your property.
What happens if you can’t come to an agreement?
Even up until the very last minute, there’s almost always a chance to come to an agreement with a lender about making repayments and staying in your house. However, there are situations where it’s just not financially possible and enforcement action is unavoidable.
If it gets to this stage, a county court judge will make a decision about what comes next. Again, this is a complicated area of law with lots of possibilities – but it will often end with either a ‘possession order’ or a ‘suspended possession order’.
What is a possession order?
When a possession order is made, a judge says the creditor can take your property. You will be given a date to leave your home and the lender will then own it.
What is a suspended possession order?
When a suspended possession order is made, the judge effectively says you can stay in your home as long as you keep up with court-ordered repayments – called an ‘instalment order’. If you don’t, your lender can apply to have you evicted. If this happens, they don’t need to give you notice – so you could face bailiffs turning up and removing you from your property.
Getting into financial trouble with a mortgage lender: The bottom line
If you’ve got a mortgage, it’s likely to be one of the largest amounts of money that leaves your bank account each month. As such, it’s also one of the first to suffer if you have money troubles.
Wherever possible, making your mortgage payments needs to be seen as an absolutely essential payment. However, if you simply cannot pay, lenders usually have a lot of options for you.
It can be tempted to avoid talking to your lender – but it will not make the problem go away. Discuss your options and always try to make a payment, however small.
Unsecured debts and your home
When it comes to personal loans, credit cards, and payday loans, it’s normal to think that these are types of unsecured debts that won’t impact your right to stay in your property. Most of the time, this is true – but if you find yourself really struggling with debt and not making agreed payments to a creditor (like a credit card provider), this can change.
This is because of ‘charging orders. A charging order is another last-resort situation to pay off your debts, but they relate to your home, so it’s important that you understand what they are.
What is a charging order?
A charging order secures a debt or debts you have against your home – even if it started out as an unsecured debt. If you have a charging order because of a debt you haven’t paid, it means that if you sell or remortgage your house, the debt will be paid off from any equity. ‘Equity’ is really just a term used to describe any money that is freed up from selling or remortgaging.
When might you get a charging order?
Charging orders can only be issued in England and Wales – however, there are similar actions available to lenders in Scotland and Northern Ireland.
A creditor will only be able to apply for a charging order if you have previously been given a county court judgment (CCJ) that relates to the debt. In effect, charging orders are only used when someone cannot or will not pay back what they’ve been ordered to by a court.
Charging orders are a long and complex process that involves a lot of work for a creditor – so you can expect lots of additional charges to be added to the debt you already owe.
A creditor will always let you know if they’re planning on applying for a charging order, so you should try to negotiate some kind of payment plan to avoid risking your home or large additional charges.
Debt solutions and your home
Hundreds of thousands of people turn to debt solutions every year as a way of getting back in control of their finances. However, some debt solutions can lead to creditors forcing you to sell or remortgage your home.
Good insolvency practitioners (the people who help with the legal side of some debt solutions) will help you to avoid action that impacts your home, but it’s not always possible.
IVAs and peoples’ homes
It’s very unlikely that you’d have to sell your home if your creditors accept Individual Voluntary Arrangement (IVA) as a way of repaying the money you owe. However, you may be expected to remortgage towards the end of the arrangement to make a lump sum payment towards your debts.
Bankruptcy for homeowners
You are at risk of losing your home if you’re declared bankrupt. However, if you seek good debt advice, you’ll be able to explore ways of potentially stopping this happening or reducing the risk.
Debt consolidation loans
Debt consolidation loans don’t come with any direct risk of losing your home – however, if you take a loan that is secured against your house, failing to make repayments could mean your home is at risk.
Debt management plan (DMP)
As long as you keep up with your rent or mortgage payments at the same time, there’s no reason why a debt management plan with your creditors should affect your home. Like all debt solutions, a DMP will affect your credit score and credit file.
Debts and your home: The final word
Your home is likely to be one of the most valuable things you’ll own in your life – and as such, threatening to take action against it is almost always the best way for a creditor to force you to repay when you owe.
If a creditor contacts you and suggests that your debts are making them consider attempting to take court action that could affect your home, it’s important that you act as quickly as possible. Seek reputable debt advice and explore ways to get back on top of your debts before your property is put at risk.