Banks turning more unsecured debts into secured ones

Bad debt levels have been the cause of major problems for banks and lenders in the UK for some years, but over the past year an increasing number of people have defaulted in their debts, with increased mortgage payments, bills, and living costs impacting on their ability to pay. However, it seems that many banks are looking to try and reclaim these debts by whatever means necessary, even if it means getting the unsecured debts turned into secured debts in order to increase their chances of getting the money back.

A recent report has suggested that banks in the UK have been applying for an increasing number of charging order, with a rise in charging order applications for last year. In 2007 many people were still struggling from the series of five interest rates hikes by the Bank of England, and therefore more may have defaulted on their unsecured loans in a bid to try and hang on to their homes by not missing mortgage repayments despite the rise in interest rates and repayments.

With a charging order the bank can effectively turn a borrower's unsecured debt into secured debt, which means that the borrower would have to repay the debt through a charge imposed on the home by the courts. The borrower does not have to sell the property right away, but the lender has the peace of mind that when the house is sold the money owed will have to be repaid.

Referring to the increase in applications for charging orders one industry official said: "It's a drastic increase. You take on an unsecured loan or credit card, you fall into arrears, the bank decides to take you to court, and if you still don't pay you end up with a charge imposed on your house by the court. Lenders are looking at all options to get their money back."

Over the course of one year applications for charging orders by banks are said to have risen by 42%. However, the rise in applications between 2005 and 2007 is said to be close to 100%. This seems to have become an increasingly effective way for banks to try and get back their money on unsecured debt. These orders are classed as a second mortgage on the home, and lenders are able to benefit from the security that at some point they will get their money back.

One debt agency official said: "Lenders are worried about people's ability to repay and a charging order gives a guarantee to the lender that at some point in the future they will get their money back." He did add: What's quite difficult for a creditor to do is to follow that through to repossess the house. Repossessions as a result of charging orders are extremely rare."