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Personal debt myths debunked
This page contains information about debt solutions available in England, Wales and Northern Ireland. Debt advice in Scotland involves similar but different solutions. Before considering an IVA as a debt solution, please make sure you fully understand the risks involved when entering an IVA.
Debt myth or fact?
Every day we tweet and debunk #debtmyths, those financial rumours and half-truths that are seen as gospel. Without pricking these bubbles, myths unnecessarily add to the burden of those worried about debt.
Follow us on Twitter as we explode these myths and give you the truth about credit and debt. And if you want the truth about your own debts, use our online debt advice service Debt Remedy or contact us for debt help.
We’ve been tweeting about #debtmyths since January – what are yours?
We’re now up to 50 debt myths. Today we’re looking for the money myths you’ve come across. Which debt myths have you found in the past? Tweet us!
March 12: StepChange Debt Charity only give debt advice to people with little or no income
We’re able to advise anyone regardless of income – and we’ve blogged before how debt can affect anyone and everyone. Higher incomes can mean higher costs of living and sometimes more responsibilities.
It doesn’t matter how much you earn. If you’re struggling to maintain your credit repayments, get in touch with us. We can advise you on the options that are available to you.
March 9: If you don’t get a loan from one bank, apply at another straightaway
You should always space out any credit applications. Multiple applications suggest fraud or, more likely, desperation.
What if a bank or financial institution assesses your suitability for new credit and decides that it’s too much of a risk for you to borrow? You should assess the outcome pragmatically.
Is there an underlying reason why you’ve been refused the credit? Would be better to talk with a debt help charity, rather than trying to apply for more credit?
For more details on all aspects of credit worthiness read our excellent credit report blogpost from Experian’s James Jones.
March 8: There are lots of free debt management companies – I’ve seen ads for them
UK-based fee-charging debt management companies that promote their services as “free”are breaking strict advertising rules. These were introduced on 1st September 2010.
This came after some organisations had been guilty of misleading the public. They claimed to offer “free” help and advice in their advertising, even though they charged. A typical plan from a fee-charging debt management company could cost around £5,000.
Make sure you never pay for debt help. We provide free, impartial debt help and advice with no hidden charges.
Other organisations offering genuinely free debt advice include:
March 7: A debt management plan is a legally binding agreement
When you start a debt management plan (DMP) you will sign an agreement. There are certain terms and conditions. However, this isn’t legally binding.
A DMP is an informal arrangement. We can help you manage your debts, and you’re free to change your mind at any time.
It’s a flexible plan and because we know that circumstances can change. If a different solution becomes available, we can advise you on it.
March 6: If your house is repossessed you will automatically be eligible for a council property
Repossession doesn’t automatically qualify you for a council house. It would depend on your situation as a whole. There’s lots of information on the gov.uk website about how to find out if you’re eligible and how to apply. If you find yourself homeless, the charity Shelter can help find you a place to live.
March 5: It takes weeks to get a debt advice appointment with StepChange Debt Charity.
Contrary to the myth voiced on internet forums, we’re usually able to offer instant appointments with debt advisors if you need debt help.
Whenever anyone calls StepChange Debt Charity for the first time they are able to speak to a helpline advisor straight away. We have the facility to transfer directly to a debt advisor if the caller has all the necessary information to hand.
And you can get debt help at all times online on our website.
March 2: All IVAs last five or six years
Most Individual Voluntary Arrangements (IVAs) last between five and six years.
However, there is a lesser known type of IVA called the ‘lump sum IVA’ which can be completed in a very short time frame.
As its name suggests. the lump sum IVA involves a client offering a one off payment to creditors. You can learn more about this lesser known form of IVA by reading our blog post on this subject.
March 1: All of your creditors need to agree to your IVA proposal for it to go ahead
All of your creditors will be sent a copy of your IVA proposal and will be given a day and time to vote at your creditors meeting.
Not all of your creditors need to accept the IVA terms for your IVA to be approved. The proposal needs to be accepted by 75% of creditors in value who vote at the meeting.
Even if some creditors vote to reject your IVA they can be outvoted by creditors who hold a higher proportion of your debt. Once approved it will be legally binding on all your creditors. Even those who voted to reject or didn’t vote at all.
February 29: If my creditors reject my debt management plan I’ll have to increase my payments
Some creditors reject reduced payments saying they want to be paid more. However, if you’re on a DMP we will have worked out a realistic income and expenditure with you. That means you’ll already be paying as much as you can afford.
Whether the creditor accepts or rejects the payment, it’s important to stick to your guns and keep up with the payments. Don’t be pressured into making extra payments. It’s likely that they’ll continue to keep requesting more and more money.
The key is to create a budget that’s sustainable and live within it.
February 28: Debt consolidation is a debt solution
In some rare instances a debt consolidation loan can be a viable option to reduce your debt. It’s important to note this is not a solution in its own right. We’ve found through many years of experience that loans can make debt problems worse, for three reasons:
- Although the monthly repayments can be more manageable, you’re actually repaying much more through interest payments
- Consolidation loans can be marketed as a debt ‘solution’. But it means taking out more credit, so this doesn’t make sense!
- And most importantly, there’s a big temptation to re-use the old credit cards included in the loan, raising the debt still further.
February 27: You have to have a certain level of debt to be offered a debt management plan
A debt management plan (DMP) can work for many clients with differing amounts of debt.
You don’t have to have a particular level of debt to be offered a DMP from us.
We don’t offer DMPs based on how much you owe. The only thing we want to ensure is that a DMP is best for your particular set of circumstances.
February 24: If I fall behind on my loan repayments for my car it could get repossessed
There are different finance arrangements when it comes to cars. If it’s a hire purchase or lease agreement you don’t own the car outright until all the repayments have been made. This means the car may be more at risk if you fall behind on your payments.
However if you took out a loan to finance the car, you own it outright. Defaulting on the loan doesn’t automatically mean repossession of the car. Of course if any of your debts went to bailiffs further down the line, repossession could be a possibility.
If you’re lucky enough to be looking at a car with a new number plate, make sure you consider all your borrowing options – assuming you haven’t saved to pay for it outright
February 23: You and your partner can do a joint bankruptcy
While some financial solutions can be obtained jointly, bankruptcy isn’t one of them, unless it’s between business partners.
If both partners in a relationship go bankrupt they have to petition individually. This means filling out two sets of forms and paying two fees (£1,400). Read more on joint bankruptcy.
February 22: It’s free to go bankrupt
Contrary to popular belief there are fees for going bankrupt – in all the countries of the UK. Find out more about bankruptcy.
If you are on a low income or in receipt of certain benefits, the court fee may be waivered but the official receiver’s fee must always be paid.
There are certain trust funds that sometimes help people with bankruptcy fees when they have a particular set of circumstances. Call us for more advice regarding this.
February 21: Every debt management provider can offer debt relief orders (DROs)
A debt relief order (DRO) is a form of insolvency that may be the best debt solution for people with a particular set of circumstances. Not all debt management companies can offer DROs as part of their in house service.
StepChange Debt Charity is a competent authority in dealing with DROs. We have a dedicated team that works solely on DRO applications, supporting our clients.
If you want to see what you best debt solution is try our impartial online debt help service Debt Remedy.
February 20: Your bank can’t take money from your account without permission
This catches out a lot of our clients. If you have debts with the bank that your income is paid to, they can take your money to pay towards your debts without warning.
For example if you have a current account and a loan with the same bank and are behind on payments, they can take money that’s in your account at any time. Remember that a lot of banks are connected nowadays (Lloyds with the likes of Halifax and Bank of Scotland, for example).
This is called the right of offset and the way around this is to open a basic bank account (PDF) with a completely impartial bank.
February 17: I can hide my possessions from a bailiff
If a bailiff enters your property for the first time, they have gained ‘walking possession’ and may return and enter a second time to take items belonging to you without your permission.
On the first visit the bailiff will take ‘levy’ of the goods in your property. A ‘levy’ is a list of items the bailiff has witnessed in your property that may be of value. The bailiff will not take any items on the first visit in order to give you time to pay the amounts owed.
You cannot hide, dispose of or remove items the bailiff has taken a ‘levy’ on. This is an offence and could have serious consequences for you.
February 16: Your student loan will be written off if you go bankrupt
There are two different types of student loans (old style and new style), but neither of them can be included in any form of insolvency.
This means whether you go for an IVA, DRO or bankruptcy, your student loan won’t be written off.
There are many differences between the two styles and you can read more about them in our student debt guide. There are instances where they will be wiped, but not through insolvency.
February 15: An IVA is the answer to my debt problem
A lot of people find out more about debt solutions before contacting us, something we actively encourage. Unfortunately this can mean that a few people are adamant about their choice of solution, even if it’s not suitable for them.
Often this ‘knowledge’ comes from:
- watching TV adverts (especially for IVAs)
- knowing someone in a similar solution
- or from web forums that give people a false sense of their financial situation based on incomplete figures.
They can think that this solution – whatever it is – is the answer to their prayers, whether it fits or not.
As with all debt charities, we’ll go through your current situation as a whole. We check your income and expenditure in detail. Then we recommend the debt solution that’s best for you.
February 14: If you have an additional credit card holder, they are liable for their own spending
If you have named someone else as an additional card holder on a credit card you are responsible for repaying all of their spending. Example include your husband, wife or partner,
As the credit agreement is in your name you are solely liable despite your partner being an additional card holder and the person who made the actual purchases.
Worried about how splitting from your partner can affect you? Read our blog about splitting up when you are financially connected.
February 13: You must go through a third party to reclaim mis-sold payment protection insurance (PPI)
It’s been widely reported that banks have to refund mis-sold payment protection insurance (PPI). On the back of this, many companies now advertise a service where they promise to do the ‘hard work’ and ‘help you’ claim your money back.
There’s no need for this, and if you think you might be entitled to a refund. There’s a really useful PPI guide which tells you everything you need to know.
If you’re thinking about putting in a claim, don’t pay for someone to do it, do it yourself. It’s easy to do and you’ll save yourself the fee.
February 10: Making a credit card’s minimum payment will clear the debt in a reasonable amount of time
Borrow £3000 on a credit card when you’re 21, pay back the minimum each month and you’ll be celebrating your 49th birthday before you’ve paid it off.
Many people think that the repaying the initial minimum payment of £71.50 (assuming a 17.9% APR) will clear the credit card debt in about 4-5 years. 41 months of £71.50 equals about £3000. Then add on a few months for interest that you think you’ll accrue.
Because of compound interest on credit cards, the amount you pay back falls each month, while the interest rate continues to add on costs.
You need to be aware of this when borrowing on a credit card. Ask yourself, before using it, can I afford the repayments? And can I repay a higher amount than the minimum each month (preferably all)?
(Figures courtesy of MoneySavingExpert – for more on minimum payments read their fantastic article on the subject.)
February 9: You have to speak to someone or have face-to-face advice if you need help with problem debt
You can get a debt solution without speaking to anyone by using our online debt management service Debt Remedy.
With Debt Remedy you complete a financial statement, detailing your household, employment, income, expenditure and debts. From this we can automatically determine your best options. If a debt management plan is the best advice we can set this up without you even needing to speak to us.
We may need to speak to you at a later date but the initial solution can be put in place online.
February 8: Overspending is the main cause of problem debt
People often assume that people can’t repay their credit debts because they’ve overspent beyond their means.
However the reality is very different, as we know that the main causes are job losses or pay cuts.
February 7: Once it’s set up, the payments into an IVA cannot be changed
An Individual Voluntary Arrangement (IVA) is a legally binding debt solution. But payment arrangements can be changed.
If the change in circumstances is a significant one your IVA Supervisor may have to call a ‘variation meeting’. This is where your creditors will be allowed to vote again on any changes to the IVA.
Some of the most common reasons for calling a variation meeting are life changing events such as:
- a sudden unexpected reduction in income
- a relationship break up
- or a pregnancy.
February 6: Charities like StepChange Debt Charity are swamped with requests & have long waiting times.
As Which? found recently, the oft-repeated story that we’re swamped with requests is just not true. We have lots of extra capacity to help you if you need debt help.
“When we spoke to StepChange Debt Charity and National Debtline we found no evidence to support this. In fact, StepChange confirmed that it was in no way overstretched and that it actually had extra capacity in place to meet a future increase in demand for its services”
February 3: The younger generation have more debt than those over 40
It’s a common assumption that those in their 20s have the most unsecured debt. Our figures actually show that debt is a bigger problem for those over 40. Sadly debt is still a major issue for many people when they get to 60 and over.
February 2: You must include your partner on your debt management plan
If all debts are in your name only there’s no rule to say that your partner’s income must be included in your DMP. If your partner doesn’t want to be on the budget, it can reflect your income and your contributions towards the expenditure only.
It entirely depends on your preference and how the household bills are split. Some couples find it easier to compile a complete budget whereas others might prefer to keep things separate.
In most circumstances, both parties would need to be included if there are joint debts.
February 1: “New government legislation can write off your debt”
We all see adverts from certain types of debt management company that promise to write off 80%, 85%, 90% or even all your debt in one fell swoop.
They’re referring to formal (or statutory) debt solutions; in England and Wales this means individual voluntary arrangements or bankruptcy and debt relief orders.
While it could be argued that an IVA usually writes off the majority of the debt, and bankruptcy and DROs even the whole of the debt, it’s not a ‘clean slate’ solution. There’s no click of a button and you’re free to start spending again, as the adverts infer.
IVAs will take five/six years to pay off, bankruptcy will take at least 12 months before discharge (and you could also pay into an income payment agreement for three years), and under a DRO you’ll have a moratorium for a similar time period. All three will remain on your credit file for six years.
Moreover, a formal process might not be the best solution to your debt problems. Speak to us first to find what’s the best solution for you, rather than what the debt management company wants you to do because of “new government legislation”.
January 31: A debt management plan will affect your credit file
A debt management plan is an informal arrangement between you and your creditors through a third party like us. Although the DMP itself won’t be marked against your credit file, any late or missed payments will.
In addition, you make reduced payments to your creditors on a DMP and this means you will default against the original terms and conditions. Any defaults or further enforcement action (such as a county court judgment for example) as a consequence of making reduced payments through a DMP will of course affect your credit rating.
Update (1/2): DMPs aren’t currently registered on credit reports as standalone entries but lenders can highlight any special arrangements or circumstances like these on the entries as ‘flags’. For more information read a similar post on the Experian website. Thanks to Focus Insolvency and James Jones for clarification.
January 30: My employers won’t be informed if I go bankrupt.
If your employment contract has no clauses about insolvency, and you don’t work in a profession that is affected by being bankrupt, you might think that your bankruptcy won’t be noted by your employer. This is the popular belief.
However, every person in employment who petitions for their own bankruptcy will have their tax code changed and your employers will become aware of this and may query the reason.
January 27: You have to pay a fee for a debt management plan
If you pay off your debt via a debt management plan there are lots of companies that will charge you a set-up fee and take a percentage from your monthly repayments. However, there are charities like us that provide this service completely free of charge.
This doesn’t mean that you’ll receive a lesser service or you’ll have to wait weeks to speak to us. You can get immediate online advice using our Debt Remedy or if you call us with all your information you can have an advice session straight away, rather than waiting for an appointment (of course you can still book an appointment if that’s more convenient for you).
January 26: A debt management plan usually takes 10 years or more to pay off
A debt management plan is a structured way to pay off your debts at a reduced rate, one that’s better for your budget rather than your creditors.
Some fee-charging debt management companies say that the average DMP client has a ten year plus haul to become debt free. However we’ve found, from a comprehensive look at every completed Stepchange Debt Charity debt management plan (numbering many thousands), that the average plan took five years, two weeks and five days to pay off (about the same time as an IVA).
Last year we released an infographic on the truth about DMPs to quash this myth.
January 25: If I have an IVA and own a property I will have to remortgage
If you own a property and are subject to an IVA, a valuation of the property is usually carried out at month 54 of the arrangement. Depending on the wording in the IVA proposal, the value of the property may be reduced by 15%. Either way if you have negative equity there will be no remortgage.
If you have equity above £5,000 you may be expected to remortgage. If no lender will offer you the facility, the IVA can be extended by 12 months in lieu of the equity in the property.
January 24: Bailiffs can force entry into your property and take any item they want
Like we’ve mentioned before, bailiffs can only be instructed by the courts. The bailiff is there to recover the money, whether this is by a payment arrangement or by taking goods from the property and selling them at auction to pay off your debt.
Bailiffs cannot break into the property unless you have already allowed them in on a previous visit, or they entered through an unlocked door or window. This is called ‘walk in possession’. Once the bailiff has ‘walk in possession’ they can use force to enter again in the future. The exception is if the bailiff is collecting unpaid magistrates fines, HMRC or business related debts.
If a bailiff enters your property, they will not take any goods on the first visit. They will usually make a list of items in the house which they can take in future. Once they have done this, it is an offence for you to remove any of these items from your house.
Bailiffs are not allowed to take items that are necessary for everyday living or working, or items that belong to someone else including children.
If a bailiff comes to collect a debt, it’s best to negotiate an arrangement outside of the property and seek debt help immediately.
January 20: If I go bankrupt I won’t have to pay anything
After the initial fee to petition for your bankruptcy is taken, the official receiver will look at your income and expenditure and decide if you need to pay into an Income Payment Order or Arrangement (IPA or IPO). This usually happens if you have more than £50 surplus income. Bankrupts are normally expected to pay any surplus income into the order/arrangement for 3 years depending on their circumstances.
Read this blog post for a salutary lesson on bankruptcy and this beginner’s guide to bankruptcy for more information. The Insolvency Service also has a leaflet for more detailed advice.
January 19: Your credit report is checked when you apply for a new job
There are certain professions such as accountants, financial advisors and solicitors that may have to go through a credit check. However, even the majority of jobs in these types of companies don’t, and the employer should tell you beforehand if they do.
For the rest of us, it’s extremely unlikely that your employers would ever check your credit report.
For more on credit reports, read the excellent blogpost from James Jones of Experian.
January 18: If you guarantee a loan for someone you don’t have to repay the debt if they can’t afford it
When you agree to become a guarantor, you are responsible for the full debt if the person that borrowed the money can’t maintain their repayments.
Not being able to pay is usually down to unforeseen circumstances, but could potentially leave the guarantor in need of debt help. For this reason we recommend that you never act as a guarantor unless you’re able to afford the repayments.
January 17: Your debts are written off if you haven’t made a payment in six years
This refers to the Limitations Act; the debt can become statute barred after six years if the debtor (or anyone jointly named on the debt) hasn’t made a payment or admitted the debt and the creditor has not secured a county court judgment (CCJ) against the debtor.
Section 2.14 of The Office of Fair Trading Collection Guidance also states that it is unfair to pursue such claims where the creditor has made no contact during the relevant limitation period.
The Act isn’t there to encourage debt avoidance or non-payment, it’s there to protect people from being forced to pay debts that have ‘timed out’ through no fault of their own. The money owed itself is not written off; it’s still a debt and in reality it still exists, but with the Act in force the creditor can no longer enforce the debt through the courts. The creditor can continue to chase the debt if they wish.
January 16: Once a CCJ is set in place you can’t change the monthly amount that you repay
If you have a change in circumstances – either income or expenditure – you can ask to amend your county court judgment (CCJ) using the form N245 (and paying a small fee). The repayments set out by a CCJ can be varied.
Read more on county court judgments (CCJs).
January 13: If you go bankrupt your name will appear in the local newspaper
There used to be a section in the local newspaper for bankruptcy, to inform creditors. Nowadays insolvencies are rarely advertised in the local paper unless it’s in the public interest and/or the official receiver believes that other creditors may want to claim (this is sometimes the case with self-employed local business bankruptcies).
Your bankruptcy, along with other types of insolvencies, will be mentioned in the London Gazette (a trade paper for creditors) and will be listed on the Government’s Insolvency Service website, searchable by name.
January 12: If you go bankrupt you will definitely lose your house
This is a complicated area and completely depends on your situation (which is why it’s important that you seek free and independent debt advice). If you have significant equity in your home, and it’s the only way to release your interest in the property, the official receiver or trustee may have to sell it to help pay the bankruptcy debts. There are exceptions to this and you can read more in this leaflet.
However, if there is little or no equity in your home, you may be able to stay there if the mortgage is affordable, comparable to local rental costs and appropriate to your needs. The official receiver or trustee still has 2 years and 3 months from the time of your bankruptcy to realise the asset if the value of the property increases.
January 11: If someone living with you has bad credit, your credit rating will be affected too
Your credit rating is based on you as an individual and is not affected by anyone you live with or share a property or postcode with, unless you have any joint accounts or have acted as a guarantor. This article has more information about how your credit report works.
January 10: If you get a county court judgment (CCJ), you will have to go to court
All paperwork relating to county court judgments is sent through the post. You would only have to attend court if you wanted to defend or vary the amount, but this is optional.
January 9: Creditors are able to send bailiffs to collect debts
Only the courts have the authority to instruct bailiffs to visit you to collect consumer credit debts . If someone came to your door calling themselves a bailiff, as long as you haven’t defaulted on a CCJ it’s likely that they’re a debt collector working for a creditor instead. These people don’t have any powers at all.
Read our special bailiff blogpost from last year for when bailiffs come to the door, and this blogpost if creditors are sending debt collectors to your home.
January 6: A creditor can repossess your house if you fall behind on credit repayments
The Creditor would first of all need to go through the courts to apply for a Charging Order to secure the debt against a property. You would get the opportunity to put your case forward and it’s very rare for them to force a sale. If house prices continue to fall and there’s little or no equity in the property, there is even less reason for the creditor to repossess a house.
January 5: If you die your family will have to pay off your debts
If you have sole debts and you pass away, creditors can make a claim on your estate if you leave any money or assets. If you have no assets then the debt will die with you. If you have a joint debt the other person will become solely liable for any outstanding money.
January 4: If you fall behind on debt repayments you can go to prison
It isn’t a criminal offence if you can’t afford your debt repayments. You can only go to prison for refusing to pay council tax, licences or magistrates fines. It’s usually the last resort, and there are other enforcements that can happen before imprisonment such as attachment of earnings
January 3: If you miss payments on your credit debt you will be blacklisted
There is no such thing as a ‘blacklist’ – experts call it “an urban legend“. If you default on your payments, this will be recorded on your credit file (PDF) which lenders use to judge how reliable you are financially.
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