The truth behind the top 20 debt myths
In the 21st Century it is easy to use the internet to get answers to important debt questions. However, it is also easy to come across incorrect information which can have dangerous consequences.
Look no further – here we answer 20 of the most common debt myths:
- I have to pay for debt advice. This is a very common myth with many people being told that impartial debt advice can only be delivered by a Debt Management Company that charges a fee. This is in fact false as impartial debt advice can come from a variety of sources without it incurring any cost to you. Payplan is one source of free advice, but you could also visit: Citizens Advice Bureau, National Debtline, Debt Advice Foundation and Christians Against Poverty.
- Bankruptcy is the quickest way out of debt. Bankruptcy is a very complex route and it should not be seen as a quick and easy way out of debt. To file for bankruptcy you must complete paperwork, attend a court hearing and meet with an Official Receiver who will go through your finances and assess your assets. In bankruptcy you may be ordered to pay any surplus income as an Income Payments Order (IPO) to your creditors. You may have to pay this for up to three years.
- I will lose my home if I go bankrupt. If you are to go down the bankruptcy route then your home, as well as your other assets, are at risk of being sold to recoup money for your creditors. However, if your home has little to negative equity then it may not be worth selling as it would not provide enough funds to make any significant difference. It is always worth taking advice with regards to your home before looking at bankruptcy to find out what risks are involved.
- Bailiffs can force entry into my home. Bailiffs collecting on behalf of unpaid County Court Judgment CANNOT force entry into your home. The only time that a bailiff CAN force entry is when they have entered peacefully before, they’re collecting unpaid fines, they are entering a commercial property or they are collecting income tax, or VAT.
- Bailiffs can take any item from my home. A bailiff can only take items that belong to the person who owes the money and they cannot take any item that belongs to a family member or your children. In addition to this, they cannot take items such as clothing, bedding, household equipment or anything that satisfies a basic domestic need. The Bailiff may need to see proof of ownership if you are stating the goods are not yours.
- Government legislation can write off debt. Unfortunately, there is no such legislation from the government that can write off 100% of debt. The only way of “writing off” any debt is through an Individual Voluntary Arrangement or bankruptcy, but you are still required to make payments towards your debts and only a percentage of debt is written off once you have made all of your payments into the plan. It may also be possible to do a full and final settlement on your debts but this would need to be agreed by the creditor.
- My bank cannot take money from my bank account without my permission. If you owe money to your bank or an associated company they are entitled to take funds from your account towards what you owe. This is often referred to as the Right to Offset and it entitles your bank to take funds directly from your current account. If your salary is being paid into an account and you have debts with the same bank then you should look to changing to one that is not associated to any of your creditors.
- Bailiffs are instructed by creditors to collect debts. Bailiffs cannot be instructed by creditors directly. The only people that can instruct bailiffs to visit your home is the Court due to you falling behind with payments towards your CCJ. If a creditor tells you that they have instructed someone to visit your home and you do not have a CCJ this will only be a debt collector/ local representative.
- If I ignore my debts, they will be wiped off after six years. Unfortunately, ignoring your debts does not mean that the debt will disappear. This myth may have come from the Limitations Act, which states that if you do not admit to the debt, have not made any payments and your creditors have not chased you within a six year period then the debt becomes Statute Barred.
- Making minimum payments is a suitable way to clearing my debts. Minimum payments are possibly the worst way in which you could repay your debts. This is because you will find that by making minimum payments you are barely covering the interest. For example, if you owe £1,000 on a credit card, with an interest rate of 17.9% and make minimum payments of 2% it will take 25 years to clear, with £1,782 in interest alone. * http://www.moneysavingexpert.com/cards/minimum-repayments-credit-card
- If I have a joint loan I am only responsible for half of it. If you took out a loan with your partner, a family member or a friend, then you are liable for the full amount that was borrowed. This is called Joint and Several Liability. Therefore, if the other person enters in an IVA, goes bankrupt or they fail to pay then you will be chased for the full outstanding amount.
- All interest and charges will be frozen when I enter into a DMP. No one can give any guarantee that interest and charges will be frozen in a DMP. All reputable companies such as Payplan will do all they can to encourage creditors to freeze or reduce interest and charges, however no one can make a promise that this will happen.
- A student loan can be added into Bankruptcy, a DMP or an IVA as a creditor. If you have a student loan then this is classed as a Priority Creditor, which means that it must be paid outside of any agreement or plan for your debts. If you are entering into a plan you must set this as a priority creditor and you are solely responsible for making sure all payments are maintained.
- Credit cards can be in joint names. You cannot have a credit card in joint names. One person will solely be responsible and liable for the debt, however you can have an additional card holder. The additional card holder will not be liable for any debt built up on the card.
- Creditors and debt collectors can contact you anytime of the day and as many times as they feel suitable. Fortunately this is not true as creditors and debt collectors cannot make excessive contact with you as this is deemed as harassment by the Office of Fair Trading (OFT) and according to the Administration of Justice Act 1970. If you feel that your creditors are harassing you then you should report them to the OFT and write to them requesting that they only contact you in writing.
- My bad credit rating will affect people that I live with. You credit rating is personal to you and your credit history, any bad credit that you have is not reflected on the household.
- Debts will need to be paid by my family when I die. When you die, as long as you have no savings or assets to sell, your debts will pass on with you. However, if you have a home or other assets your family may be forced to sell them to release money to pay your creditors.
- Debt Consolidation is the same as a DMP. Debt Consolidation is where you take out a new larger loan to cover all of your borrowings. A DMP is a plan, supported by a third part such as Payplan, where you make one regular payment and this is distributed to all of your creditors.
- I must be a homeowner to take out a Debt Consolidation loan. You do not have to be a homeowner, however generally homeowners may find it easier to obtain a debt consolidation loan as they can be secured on the home. This is not always the case, however this is fairly common.
- I will be sent to prison for not paying my debts. You cannot be sent to prison for failing to pay your unsecured debts. However, if you fail to pay fines, community charges, business rates or council tax then you do risk a Magistrates Court using its power. If you are unable to maintain these payments it is always in your best interest to remain in contact with them to avoid any unnecessary action.
I am sure that there are many, many more myths out there. If you have come across any we would love to hear from you.
This article was checked and deemed to be correct as at the above publication date, but please be aware that some things may have changed between then and now. So please don't rely on any of this information as a statement of fact, especially if the article was published some time ago.
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