When a creditor is worried that an consumer debt is not being paid back by a specific debtor as it falls payable, one option that the creditor may take a look at is to look to alter the type or rank of the unsecured debt from being unsecured to being secured. Basically the creditor might take legal measures to have a lawful claim on the debtor’s assets up to the amount of the delinquent and unsecured debt. This action involves requesting the Court to make a Charging Order against the debtor’s property. This property is more often than not the debtor’s residence but it could be any of the debtor’s possessions.

How might the lender go about this course of action? The creditor has to satisfy the court that the borrower has not repaid a legitimate personal debt to the creditor as it fell due. The lender asks the Court to make a Charging Order against the debtor’s property. If the court creates the Charging Order required, the creditor’s interests are covered in the event that the borrower should later choose to go into an Individual Voluntary Arrangement or to declare themselves Bankrupt. Ordinarily, the Court initially creates an Interim Charging Order to allow time for the borrower to challenge the debt or to come to an amicable agreement with the lender in relation to discharging the debt. Should no such arrangement be achieved, the Court will in due course make a Final Charging Order empowering the lender to convert the rank of the liability from being unsecured to being secured.

After the Final Charging Order is granted, if the borrower does not pay the liability at issue, a choice open to the creditor is to seek and get from the Court an order for the sale of the property or to force the repossession of the property, even though this action is comparatively exceptional. If the borrower clears the debt, then the Court can and will get rid of the Charging Order on receipt of the pertinent request by the debtor.

Where a Bankruptcy Petition is presented against a debtor and an Interim Charging Order has already been granted to a creditor, the question arises as to whether the court will make a Final Charging Order or adjourn the hearing of the Final Charging Order until after the Bankruptcy Order has been made, or not, as the case may be.

If either the creditor, who is seeking the Final Charging Order, or the judge, who is conducting the hearing relating to the Final Charging Order, are aware of the Bankruptcy Petition, then the proper course of action is for the judge to adjourn the Final Charging Order hearing until the Bankruptcy Court has made a Bankruptcy Order, or not, as the case may be.

If however neither the creditor nor the judge are informed of the Bankruptcy Petition and a Final Charging Order is made, then that Final Charging Order is good and the lender is entitled to retain the security they have acquired via the Charging Order, on condition that that creditor behaved in good faith, for value and had no notice of the Bankruptcy Petition.

The date of a Bankruptcy Order signals the beginning of the Bankruptcy for the purposes of section 278 of the Insolvency Act 1986 (IA1986). Basically this means that the date of the Bankruptcy Order, and not the date of the Bankruptcy Petition, is the date of the vesting of the bankrupt’s assets in a trustee. Under the IA 1986, dispositions between the presentation of the Bankruptcy Petition and the subsequent Bankruptcy Order are not capable of being avoided under s284 IA 1986, in relation to a recipient acting in good faith, for value and without notice of the Bankruptcy Petition.

Speak to a debt counsellor if you’ve been supplied with an Interim charging order.