In these times of financial uncertainty, many people are being forced to make decisions about what debts they can afford and which ones they can’t.
It’s not an easy decision and there are a number of factors people take into consideration when they weigh up their options.
First, which debts charge the most interest? It seems sensible to concentrate on these first: so that credit card where you are paying 39% APR – that has to go first; or maybe the overdraft with the daily charges?
Then there are the debts that are secured over possessions that are important to you. The car finance agreement; or maybe the hire purchase agreement that you took out for the sofa. You need your car to go to work and where will you sit if you don’t have a sofa?
Then there are the debts where the lenders are the most frightening. So you have the council tax, and the threats to send round the Sheriff Officers, surely they must come first?
When struggling with debt it’s important to to be aware of the impact not paying certain debts can have on your home – especially credit cards.
What about the debts that could cost you your home?
An obvious one is your mortgage. That has to be paid, obviously, but can other debts also lose you your home?
In 2017, the website Mortgage Strategy published an article that warned six of the top 10 UK mortgage lenders were using a little known provision, called an “all monies charges” clause in their residential mortgage documents and this gave them a right to secure other debts, such as credit cards, on mortgage properties.
They found that Barclays, Santander, the Royal Bank of Scotland, HSBC, Yorkshire Building Society and Virgin Money, all used these clauses and what that meant was if you defaulted on other agreements you held with them, they then could use them to call up your mortgage.
Could you lose your home over consumer credit card debt?
This matter, however, has previously been considered before the High Court in Northern Ireland, where the Judge, Justice Girvan, found in one case, (Northern Bank Ltd v McKinstry), the Bank could not use an overdraft to call up a mortgage the defendants had over their home.
The reason being, he found, other than concerns he had about the wording of the Mortgage Agreement, was under the Consumer Credit Act 1974, there are clear rules about what lenders must do if they want to secure a credit card, overdraft or personal loan, over someone’s home. Certain paperwork has to be completed and exchanged and people must be made aware the debt is being secured over their home. Lenders cannot simply include an obscure clause into their mortgage contracts.
So, simply defaulting on a consumer debt, such as a credit card, personal loan or overdraft, even if it is owed to the person who gave you your mortgage, cannot place your home at risk of repossession, unless you expressly agree in writing the debt will be secured on your home.
Are there other ways unsecured debts could put your home at risk?
It may not be possible, therefore, for a mortgage provider to use an “all monies charges” clause in a mortgage to repossess your home; however, this doesn’t mean unsecured debts may not place your home at risk.
Like all lenders, consumer credit lenders can take you to Court and obtain a Judgement (or in Scotland, a decree) if you don’t pay your debts. This can then be used to place a Charging Order over your home (except in Scotland), or be used to make you bankrupt. Both of which could place your home at risk.
So, it’s not totally true that unsecured debts cannot be used to force the sale of your home or any other property you may have.
So what debts should you pay first?
It is for this reason that debt advisers always advise when you are struggling to pay your debts, you should not take a piecemeal approach to tackling the problem.
It should never just be a case of paying the lender who shouts loudest, or threatens most.
Instead it is better to get advice and take a holistic approach, exploring all options open to you and decide what one will give you the best protection.
In England, Wales and Northern Ireland this may be an Individual Voluntary Arrangement or Debt Management Plan; whereas in Scotland it may be a Protected Trust Deed or a Debt Payment Programme under the Debt Arrangement Scheme.
If you are struggling with problem debts and want advice on how you should deal with them, speak with a Carrington Dean money advisor on 0808 253 3460, if you live in Scotland; or Creditfix on 0808 253 2966, if you live in the rest of the UK.
