SHORTFALLS ON MORTGAGE REPAYMENTS- A DIY FIGHT BACK KIT- Revisited

This is a re-posting of a piece I wrote three years ago, the facts are clearly different today, however the Legal position remains the same, however the information here is no substitute for obtaining legal advice, please, please consult a Solicitor or the Citizens Advice Bureau

There’s been a pretty choppy property market in the last few years, luckily all the doom and gloom predictions haven’t quite come true yet. Having said that we’re not out of the woods yet, the fact remains that the property market in the South-East is inflated, the hammer might yet fall.

This takes me back to the 80’s when the last crash in the market took place and the negative equity virus spread like wild-fire. If my memory serves me well, lots of home-owners simply walked away from their properties and let the Banks repossess them. A fairly simple solution ordinarily, however was it? In principle no, because there were usually shortfalls in the amount due to the Banks, since there was in any event a negative equity position. The Banks at the time didn’t bother, preferring to just let matters ride or in many other cases commencing Bankruptcy proceedings at the time against debtors….and getting nothing.

As it turned out the property market resurged in the mid-late 90’s, with the general air of prosperity prevalent in cool Britannia, people were making and spending money, some buoyed by cheap and available credit, others actually making good money, inclusive in this quota being some of the victims of the negative equity virus of the mid 80’s who equally had moved on and were making new starts acquiring property.

As is to be expected, on or about the first quarter of 2003, there was a spate of actions by Banks seeking to recover the monies owed them as shortfall on the Mortgage Loans in question. The easy (and admittedly most effective) tool of Debt Recovery in the 21st Century UK Economy is a Bankruptcy Petition or the threat of it against a person who owns visible assets. This appeared to be the preferred route for most of the Banks and did they go for it.

I had occasion to act in such a matter for a Client who was being chased by a Lender for a shortfall of £6000.00, which had now burgeoned into £48,000.00 (Interest). The property was repossessed in 1992, and the Bank served a Statutory Demand (which is the prelude to filing a Petition for Bankruptcy, essentially a warning to pay the Debt in the Demand within 21 days) in 2003. A Judgement had in the interim been obtained in the County Court in 1994.

We filed an application to set aside the Statutory Demand (which you are allowed to do within 18 days of being served with the Demand).

We relied on the following:
The Original Mortgage Loan was £25,000.00 and the property was sold by the Bank on repossession for £35, 000.00+ Hence the shortfall constituted of accrued Interest.

The Bankruptcy action ought to have been brought within Six years, since the Interest element was all that was being recovered and an action for Interest is an action under Simple Contract not a Speciality Contract such as a Mortgage Deed, upon which action may be brought within 12 years Being a principle established by the House of Lords in Bristol & West plc v Bartlett [2003] 1 WLR 284

A Bankruptcy Petition is not merely Enforcement of a Judgement but a distinct Cause of Action or Claim which is subject to the Rules on Limitation of Actions. (Applying IN RE JELLY and Section 6 of the Limitation Act 1980).

The High Court agreed with us and set aside the Statutory Demand, however it noted that they were still entitled- if they wished- to seek enforcement of the Judgement obtained in 1994, this of course not being within its power to deal with since they had come under a totally different procedure. I equally found it interesting that they hadn’t gone down that route, I later found out that the records of the Case in 1994 had been destroyed by the Court in 2000, hence enforcement was a problem. They did not bother appealing.

Simple lessons stemming from this in plain English:

If you owe your Bank a shortfall on a Mortgage, they have six years to come after you if the shortfall is on the Interest and 12 years if it consists of the Principal Mortgage Loan. This is because the Contract for Interest is separate for the Contract for the Principal Loan. The latter is contained in a Mortgage Deed, described as a Contract of Speciality, which as said has a 12 year time span for a Claim to be brought in Court as opposed to 6 years for the Contract for Interest, which is under what’s called a Simple Contract. This principle of Limitation applies to all actions for Money and is not necessarily restricted to Mortgage Shortfall cases.

The time is calculated from the date you default in your Mortgage repayment, i.e when “the cause of action accrues”. (This principle has recently been firmly established as the current Law on this subject by the House of Lords last year in West Bromwich Building Society v Wilkinson [2005] 1 WLR 2303)

If they do not do this then you can raise it as a defence to the Court action they’ve brought against you. Its called a Limitation Defence. Bear in mind however that if the Bank issues a demand after the cause of action “accrues”, then the Limitation period then has to be calculated from the date of the demand.

If however the Bank gets or has gotten Judgement against you, then there is no time limit for it to enforce the Judgement. Enforcement refers to action taken by a party at law to recover a Judgement its obtained, such as Attachment of Property (the good old Bailiffs), Attachment of Earnings, etc. For this there is no time limit. Be careful.

In conclusion a word of warning, never ignore demand letters, always keep a conversation going with creditors and always demonstrate good faith by making a payment no matter how small. If however the Lenders adopt a rigid stance, talk to an IFA or a decent Solicitor. The main lesson is that in a capitalist world they never go away (debts that is- not the Solicitors and IFA’s).