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BRIEFING PAPER

Number CBP5746, 6 November 2018

Debt enforcement By Lorraine Conway

Contents: 1. Introduction 2. What is debt enforcement? 3. Debt enforcement methods 4. Insolvency proceedings 5. Where to go for help

2 Debt enforcement

Contents Summary 3

1. Introduction 4

2. What is debt enforcement? 5

3. Debt enforcement methods 6 3.1 Warrant of Control or writ 6 3.2 Third Party Debt Order 7 3.3 Attachment of Earnings Order 8 3.4 Charging Orders 9

What are Charging Orders? 9 When can an application for a charging order or order for sale be made? 10

4. Insolvency proceedings 12

5. Where to go for help 13

Cover page image copyright: Oxford County Court by Kaihsu Tai. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license / image cropped.

3 Commons Library Briefing, 6 November 2018

Summary Creditors can begin proceedings in court to recover payment of an unsecured money debt. If a creditor is successful and obtains judgment in their favour, the next step is to enforce the judgment. The court will not enforce a judgment order unless it is specifically asked to do so. In civil enforcement proceedings in the county court, the judgment is referred to as a CCJ; the person who owes money is known as the 'judgment debtor'; and the person who seeks payment is known as the 'judgment creditor'.

There are various debt enforcement methods open to a judgment creditor. Each method has its own particular strengths and weaknesses. The right method of civil debt enforcement will depend in large part on what assets the judgment debtor owns and his/her income. The main debt enforcement methods are as follows:

• A warrant of control or writ empowers court enforcement officers (often referred to as bailiffs) to attend the judgment debtor’s address to take control of assets to sell at public auction in order to pay off the debt.

• Under a Third Party Debt Order, money owed to the judgment debtor might be paid directly to the creditor from their bank or building society account.

• Under an Attachment of Earnings Order, money is stopped from the judgment debtor’s wages to pay a debt (obviously, this type of order is only an option if the debtor is in paid employment).

• A Charging Order turns an unsecured debt into a secured one. Under this order a legal charge is placed on the judgment debtor’s property (usually the debtor’s home) to the value of the debt (plus interest). If the property subject to a charging order is sold, the full amount of the charge has to be paid before any of the proceeds of the sale can pass to the judgment debtor.

This briefing paper provides a summary of the different types of debt enforcement methods that could be considered by a judgment creditor.

4 Debt enforcement

1. Introduction Some people who are involved in a debt dispute decide to bring proceedings before their local county court. Cases are usually allocated to the small claims track if they’re worth £10,000 or less and it is against a person, a company or an organisation in England or Wales.1 If the claim is for more than £10,000, it will generally be dealt with by the fast track or the multi-track process.

By way of example, the small claims track will deal with the following types of claim:

• Compensation for faulty goods (e.g. faulty tumble dryers, washing machines or cars)

• Compensation for faulty services (e.g. by builders, garages, etc.)

If a court, having considered all the evidence, decides that a debt is properly owed, it will make a judgment order in favour of the claimant. In legal terms, the claimant is said to have “obtained judgment against the defendant”. The county court judgment order is known as a CCJ. The claimant becomes the “judgment creditor” and the defendant the “judgment debtor.”

Once a CCJ has been issued against them, some judgment debtors will immediately pay the debt in full, in which case, the matter is closed. Others may not. They may refuse to comply with the CCJ or simply ignore it. The court will not enforce a judgment order unless it is specifically asked to do so. This means that the judgment creditor must go back to court to force the judgment debtor to pay.

1 If a case is complex, the judge may refer it to another track for a full hearing – even if

it’s below the financial limit of that track

5 Commons Library Briefing, 6 November 2018

2. What is debt enforcement?

Box 1: Debt enforcement methods

The main debt enforcement methods open to a judgment creditor are as follows:

• Warrant of control or writ - instructs court enforcement officers (bailiffs) to attend the judgment debtor’s home or business premises to take control of assets belonging to the debtor to sell at public auction in order to pay off the debt.

• Attachment of Earnings Order – provides that a proportion of the judgment debtor’s earnings be deducted by his employer and paid to the judgment creditor until the judgment debt is paid. Obviously, this order is only effective if the debtor is in paid employment.

• Third Party Debt Order - by these orders, sums owed to a judgment debtor that are in the hands of a third party (such as a bank or building society) are frozen and seized for the benefit of the judgment creditor.

• Charging Order – a Charging Order is a way of securing a judgment debt by imposing a charge over a judgment debtor’s beneficial interest in land, securities or certain other assets. This prevents the judgment debtor from selling the asset without satisfying the judgment debt. Ultimately, it would be for the court to decide whether or not to make such an order.

Box 1 above, outlines the main debt enforcement methods. Each debt enforcement method has its own particular strengths and weaknesses. In some circumstances, it may be possible for different enforcement methods to be used alongside side each other, although leave (i.e. permission) of the court may be needed first.

The right method for the creditor to pursue will depend on what assets the judgment debtor owns and the debtor’s income. To help them decide, the judgment creditor can apply to the court for an “Order to Obtain Information”.

A judgment creditor can request that the judgment debtor is called into court for an Order to Obtain Information. It is important to note that an Order to Obtain Information is not a debt enforcement method (i.e. it is not a method of attempting to retrieve the money owed), but an interview to discover information about the debtor’s financial situation. It involves the judgment debtor (including a limited company) going before the court to answer detailed questions about their financial affairs.

An order to obtain information

6 Debt enforcement

3. Debt enforcement methods

3.1 Warrant of Control or writ Enforcement of a judgment debt by taking control of goods is governed by Schedule 12 of the Tribunals, Courts and Enforcement Act 2007 (TCEA 2007) and regulations issued under the Act, the Taking Control of Goods Regulations 2013. Civil Procedural Rules 83-85 deal with the procedural rules for obtaining a writ or warrant of control.2

Taking control of goods is a popular debt enforcement method due, in large part, to its speed. It begins with the judgment creditor applying to the county court for a warrant of control (or, in respect of the High Court, a Writ of Control). Notice to the debtor is not required at the time of the issue of the warrant or writ (although notice must be given later by the enforcement officer).

Before the court will issue a warrant or writ of control, the judgment debtor must have either:

• Failed to pay the amount they have been ordered to pay in the time specified.

• Fallen behind with at least one of his or her payments under an instalment order.

If issued, a warrant of control or writ instructs enforcement officers (bailiffs) to attend the home of the judgment debtor in order to take control of, and sell at public auction, his goods in order to raise sufficient funds to pay the judgment debt and associated costs. However, enforcement officers cannot make a forcible entry (so they may have to make more than one visit before they are allowed in). Where goods are seized, the judgment debtor usually has the opportunity to repay the debt and keep his/her goods.

By law, enforcement officers cannot take the following items:

• essential household items which the debtor and his/her family need such as clothing or bedding;

• items or books which the debtor needs for his/her job or business (such as tradesman's tools or other equipment necessary for personal use in employment or business);

• items which are leased, rented or are on hire purchase agreements (but goods on credit sale can be seized because they are deemed to belong to the debtor);

• goods which may have already been seized by enforcement officers (bailiffs) acting under another warrant

In addition, enforcement officers cannot take goods belonging to anyone other than the person named on the warrant or writ. For example, the enforcement officer cannot take goods which belong to the debtor’s partner, but can ask for proof of ownership.

2 Taking control of goods and selling them to raise funds replaced execution of goods

as a method of enforcing a money judgment from 6 April 2016

Enforcement officers (bailiffs) and taking control of goods

7 Commons Library Briefing, 6 November 2018

In the case of a corporate judgment debtor, enforcement officers will attend the business premises. Depending on what assets the company has, they might will take control of stock, machinery, office equipment or vehicles to sell (subject to any third party rights).

Obviously, the success of this method of debt enforcement is dependent on the judgment debtor having goods of sufficient value. Specifically, he/she must either have:

• goods which can be sold at auction to raise sufficient money to meet the judgment debt (or large part of it); or

• enough money to pay the judgment debt to stop goods being taken and sold

In some cases, the judgment debtor may be “made of straw”, that is to say, he/she may own nothing of value. If the bailiffs are unable to recover sufficient money to repay the debt, the debt will normally pass back to the judgment creditor for further action. This is not an unusual situation. Judgment creditors may have to try more than one debt enforcement method before they can recover payment of their debt.

Further detailed information is set out in a separate Library briefing paper, “Bailiffs” (CBP4103) (dated 19 September 2018).

3.2 Third Party Debt Order Under a Third Party Debt Order (previously known as a garnishee order) sums owed to a judgment debtor but are held by a third party (usually a bank or building society) are frozen and seized for the benefit of the judgment creditor. The process is as follows:

• Money in the hands of the third party (usually a bank account) is frozen. An interim order will prevent the judgment debtor having access to the money until the court makes a decision about whether or not the money should be paid to the judgment creditor to satisfy his money judgment.

• Once a final order has been made by the court, the third party is obliged to make payment to the judgment creditor and not the judgment debtor.

• The debt owed by the third party to the judgment debtor is extinguished on the payment to the judgment creditor.

The court’s power to make an order over a judgment debtor’s property is contained in Civil Procedure Rule 72. (It should be noted that much of the case law governing old Garnishee Orders is still applicable.)

Obtaining a Third Party Debt Order is a two-stage process:

• An application is made for an interim order. The application will initially be dealt with by a judge without a hearing to speed-up the process.

• A subsequent application for a final order. A full hearing is required before the final order is made.

An interim order will not be granted by the court where the application for it is considered to be “speculative”. Moreover, if, pending the full

A judgment creditors may have to try more than one enforcement method before they can recover payment of the debt

Interim Third Party Debt Order

Final Third Party Debt Order

8 Debt enforcement

hearing, the judgment debtor thinks that the interim order is unfair (e.g. he/she is unable to pay ordinary living expenses), he/she must make an application to the court for an order permitting the bank or building society to make a payment out of the account.

Third Party Debt Orders can be very effective, particularly, if it is known that the Judgment debtor has a bank account into which his salary is paid. However, they cannot be used in respect of joint accounts unless all other named account holders are also joint judgment debtors.

3.3 Attachment of Earnings Order An Attachment of Earnings Order (AEO) is only available against individuals and in the County Court, although a judgment can be transferred from the High Court to the County court for the purposes of obtaining an AEO. As it is a method of enforcement which must be commenced in the County Court, interest may not accrue to the judgment debt except where the proceedings fail to produce any payment from the debtor in which case interest shall accrue as if those proceedings had never been taken.3

Under an AEO, a specified sum will be deducted from the judgment debtor’s wages/salary by an employer, who forwards the money to the relevant court to pay the judgment debt. Obviously, this type of order will only apply in circumstances where the judgment debtor is in paid employment. The procedure to be followed for an AEO is set out at Civil Procedural Rules 89.

The basis of deduction is guided by set rates applied to the judgment debtor’s resources. The court cannot make an AEO if the judgment debtor’s take home pay is below a certain level (known as the “protected rate”).

An application for an AEO is made to the county court that made the CCJ. An application cannot be made if the judgment debtor is any of the following:4

• Self-employed

• A corporate or partnership judgment debtor

• In the armed forces5

• A merchant seaman6

Before an application can be made, two conditions must be satisfied:

• First, the judgment debtor must be in arrears by at least one payment in respect of the judgment debt; and

• Secondly, the amount owed must be £50 or more

3 Section 4, County Courts (Interest on Judgment Debts) Order 1991 4 Section 24, Attachment of Earnings Act 1971 5 There are special arrangements for recovering a debt from someone in the armed

forces or a merchant seaman 6 Ibid

Protected Rate

9 Commons Library Briefing, 6 November 2018

Where the judgment debtor has other creditors and his total indebtedness does not exceed £5,000, the court:

• Has a duty to consider whether the debtor’s liabilities should be dealt with together under a County Court administration order

• Can refuse an application for an individual AEO.7

Under a County Court administration order, the judgment debtor makes one payment to the court each week/month (no interest is payable). While the judgment debtor is paying, creditors cannot take any further action against him without first asking the court (a moratorium).

It should also be noted that in circumstances where the judgment debtor has a number of live CCJs against him/her, they can apply to the county court for a consolidated AEO. In effect, the employer will be ordered to deduct one monthly payment in respect of all outstanding CCJs, thereby saving the judgment debtor some costs. It would be for the court to decide how this money should be allocated amongst the various judgment creditors.

An advantage of this method of debt enforcement is that it provides for an automatic deduction from wages – the judgment creditor does not have to rely on the debtor making payment. A disadvantage is that it can take a long time to pay off the debt. It is also important to note that obtaining an AEO may preclude the use of other methods of debt enforcement.

3.4 Charging Orders What are Charging Orders? In recent years, creditors seeking to recover payment of unsecured consumer debts have increasingly used Charging Orders as a method of debt enforcement. They are most effective when there is substantial equity in a property and the judgment debtor is the sole owner. This method of debt enforcement is less satisfactory if there is limited equity in a property or it is jointly owned.

Under section 1(1) of the Charging Orders Act 1979 (COA 1979), the court has the power to make an order over a judgment debtor’s property. In the majority of cases, Charging Orders are made against the debtor’s own home but an order could also be made against the debtor’s interest in land (freehold or leasehold) or stocks and shares. The amount charged is the amount which the creditor owes plus accrued interest and costs. To all intents and purposes, a Charging Order secures the debt.

Obtaining a Charging Order is a two-stage process:

• an application is first made to the court for an Interim Charging Order; and then

• a second court application is made for a Final Charging Order

7 Section 4, Attachment of Earnings Act 1971

Charging Orders secures the debt

County Court Administration Order

Consolidated AEO

AEO may prevent the use of other debt enforcement methods

10 Debt enforcement

An interim order is usually granted by the court to stop the debtor from selling a property before a final order can be considered.

It is important to note that a Final Charging Order over land is an equitable charge and as such, is subject to any prior charges on the property. In order to achieve priority over other equitable charges, a charging order must be registered at the Land Registry.

If the property is subsequently sold, the full amount of the charge has to be paid before any of the proceeds of the sale can pass to the judgment debtor. If there are a number of charges on the property they will take priority according to the date that the charges were registered with the Land Registry.

Possession and registration of a Charging Order does not, in itself, lead to repayment of the debt. The order is normally viewed as security for a debt, not satisfaction of it. The various options open to the judgment creditor include:

• To await the sale of the property in due course by the owners, or following an order for sale obtained by other creditors.

• To simply leave it in place whilst he/she pursues another course of enforcement action, such as entering into a repayment agreement.

• To make a further, separate application to the court for an Order for Sale. If granted, this order would force the sale of the property (either immediately or at some point in the future if a suspended order is made). Ultimately, it would be for the court to decide whether or not to grant this order.

When can an application for a charging order or order for sale be made? The rules about when a judgment creditor can apply to the court for a Charging Order changed in 2012. Specifically, sections 93 and 94 of the Tribunals, Courts and Enforcement Act 2007 (TCEA 20070), were brought into force by the Tribunals, Courts and Enforcement Act 2007 (Commencement No.8) Order 2012.8 Both sections amend the Charging Orders Act 1979 (COA 1979).

Under section 93, which came into force on 1 October 2012, where a debtor is required by a county court or high court to pay a debt by instalments, an application for a Charging Order may be made straight away by the judgment creditor even though there has been no default in payment, but:

• the court must take the fact there has been no default into account in deciding whether to make the order; and

• an Order for Sale to enforce the Charging Order may in any event not be made where there has been no default in payment.

8 SI 2012 No.1312

Orders for Sale

A registerable equitable charge over land

Charging Order

11 Commons Library Briefing, 6 November 2018

The aim of this provision is to encourage judgment creditors to enter into affordable repayment schemes with debtors, with the reassurance of knowing that there is security on the money they are owed.

Section 94 of the TCEA 2007, which came into force on 17 May 2013, inserts into the COA 1979 a new provision (section 3A) giving the Lord Chancellor a power by regulations to set financial thresholds for:

• the making of Charging Orders; and

• for the enforcement of such orders by an Order for Sale

In December 2012, the Ministry of Justice confirmed that it did not plan to introduce a financial threshold for the making of Charging Orders. However, it did propose to do so regarding orders for sale.

The Charging Orders (Orders for Sale: Financial Thresholds) Regulations 2013 (SI 2013/491) came into force on 6 April 2013.9 The Regulations introduce a minimum financial threshold of £1,000 for applications for Orders for Sale in respect of Charging Orders made to enforce payment of a debt under a “regulated agreement” (defined as a consumer credit agreement or a consumer hire agreement under section 189(1) of the Consumer Credit Act 1974 (CCA 1974).)

The new Regulations relate only to regulated debts defined within the CCA 1974. The rationale for introducing a financial threshold only in respect of these types of debt (and not all debt) is because the lender has priced the recovery risk into their premium interest rates. Creditors not covered by the CCA 1974 (such as individual creditors, utility companies, local authorities) are unable to take this measure and have limited means to recover monies owed to them.

It should be noted that applications for Charging Orders and Orders for Sale are always listed for hearing before a judge. In other words, they are subject to case-by-case judicial discretion and case law.

9 SI 2013 No.491

No financial threshold for the making of Charging Orders

12 Debt enforcement

4. Insolvency proceedings As an alternative to obtaining a CCJ and pursuing debt enforcement methods, the judgment creditor could, in certain circumstances, begin insolvency proceedings. The threshold for filing a bankruptcy petition increased from £750 to £5,000 on 1 October 2015.10 (In effect, the judgment creditor needs to prove that they are owed at least £5,000 or a share of debts totalling at least £5,000).

However, this increase in threshold debt level applies only to bankruptcy petitions (i.e. personal insolvency). In respect of petitions to wind-up a company, the threshold sum remains £750.11

After a bankruptcy or winding-up order is made, the assets of the judgment debtor are collected by a trustee in bankruptcy or liquidator and then distributed among all the creditors in accordance with the insolvency rules. Whether it would be possible for the judgment creditor to recover all the money owed would depend, in large part, on the total value of assets and the claims of other creditors.

Insolvency procedure can be expensive and if the judgment debtor has few assets and a number of other creditors there is no guarantee that the judgment creditor will receive any of the money owed.

10 Section 123(1)(a) of the Insolvency Act 986 11 The Insolvency Act 1986 (Amendment) Order 2015 (SI 2015/922) was made on 19

March 2015 and came into force on 1 October 2015. The Order amends section 267(4) of the Insolvency Act 1986 by increasing the bankruptcy level to £5,000. The amendment made by the Order applies to bankruptcy petitions presented by creditors on, or after, 1 October 2015.

13 Commons Library Briefing, 6 November 2018

5. Where to go for help It is important to note that whatever debt enforcement method is followed, the court cannot guarantee that the judgment creditor will get all or any of the money they are owed (and they will have to pay court fees). This is why it is important that the judgment creditor first seeks proper legal advice as to which method of enforcement would be the most appropriate given what is known about the judgment debtor’s circumstances).

The Library has published a separate briefing paper, “Legal help: where to go and how to pay” (CBP 3207) dated 9 June 2017.

Local Citizen’s Advice Bureaus (CABs) can give free advice. The Citizens Advice website contains a search tool to help people find their nearest CAB.

National Debtline provides free and confidential debt advice via the telephone on 0808 808 4000. They also offer an online web chat.

StepChange, a debt advice charity, offer a free helpline for advice on debt management: 0800 138 1111. They also offer an online web chat.

BRIEFING PAPER Number CBP5746 6 November 2018

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