If I do a debt management plan, will I get a charging order?

With more people than ever before carrying out debt management plans, the risk of receiving a charging order against your property is also increasing.

A debt management plan (DMP) can be used by an individual who is struggling to repay the debt that they owe.

The plan is based around an agreement with creditors to reduce the payments that are made towards personal debts such as credit cards and loans so that they fit into an amount that is affordable.

There are no official statistics measuring the number of DMPs that are put in place.

However it is widely accepted that at least as many people choose to go into debt management every month as declare themselves formally insolvent by using an individual voluntary (IVA) arrangement or bankruptcy.

In fact, the figure could easily be double that of formal insolvencies which would mean well over 200,000 people in England and Wales start new debt management plans every year.

Securing the debt

With such a large number of people struggling to repay their debt, creditors are increasingly looking for ways to ensure that they will eventually be paid everything that they are owed.

One way for a creditor to do this is to take out a charging order against the debtor's property.

If a charging order is issued, this secures the debt meaning that when the property is sold, the debt outstanding will be paid before any proceeds from the sale are given to the home owner.

The introduction of a charging order does not mean that the creditor can force the sale of a property.

Forced sale could only be achieved if the court granted an order of sale which would be rare. However, the creditor is then confident that the outstanding debt will eventually be repaid even in the case of the debtor subsequently entering into an IVA or even declaring bankruptcy.

Will a charging order always be issued?

If you start a debt management plan, this does not automatically mean that your creditors will apply for a charging order.

However unlike an IVA, a DMP does not give legal protection against further actions from your creditors and so application for a charging order will always remain a possibility.

Of course, the main criterion is that you must be a home owner.

If you do own a property, your creditor must first apply for county court judgement (CCJ) against you. An application for a charging order can only then be made if you do not pay the judgement as ordered.

For this reason, many creditors will not look to introduce a charging order. However, some are more likely to do so than others. This is particularly the case with Northern Rock if you default on the unsecured element of a "Together Mortgage".

It is worth re-iterating that if you are struggling with repaying your debts and choose to start a debt management plan, this does not mean that you will automatically get a charging order.

However, unlike using an IVA where you are legally protected against such action, if you are a home owner, you must understand that the possibility of receiving a charging order cannot be ruled out.

If you are struggling with debt, visit www.BeatMyDebt.com

Our vibrant forum gives free access to industry experts and others who have suffered with debt problems.

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