10 Debt Myths!

There are hundreds of myths about the debt industry - everyone has a mate, family member, work colleague that has a story about debt problems. We've taken some of the worst debt myths in this post... enjoy! Please contribute your own too!

Debt Myth 1 - You can't tell anyone

Often people think they can't tell anyone about their debt problem or it'll result in receiving additional threats and worry more people. Millions of people each year turn to debt advice charities and receive debt advice. There are a number of different debt solutions available including Bankruptcy, IVA, Trust Deed, or Debt Management Plan. 

You are not alone - speak to a debt charity or tell a friend or family member. A problem shared is a problem halved.

Debt Myth 2 - Debt advice companies are all the same

Some debt companies will act within your best interests but most want to make money from your misery. Research and check out your debt company. We advise speaking to a debt charity who can give you informal debt advice

 

Debt Myth 3 -"Write off your debt"

In some debt solutions you can write off your debt but this will have a negative impact on your credit rating and make obtaining credit again in the future difficult. Rarely can you write off as much as the adverts say - it's typically 50% debt being written off in an IVA or Trust Deed.

Debt Myth 4 - I'll never have a bank account again

Lots of banks are now creating bank accounts for people who have a bad credit history. If you are entering a debt solution ensure you change banks if one of your creditors is the bank you currently bank with. 

Remember, ask for an account without an overdraft!

Debt Myth 5 - Paying fees for Debt Management

You DO NOT HAVE TO PAY FEES FOR A DEBT MANAGEMENT COMPANY! We've bolded it because it's one of the most mis-understood myths about the debt industry. There are fee debt management plans where you don't have to pay for the solution. Instead the creditors pay the debt management company fee so you don't have to. Speak to any debt charity - they'll steer you right!

Debt Myth 6 - Bankruptcy will take my home

Most people are scared their debt will mean they will lose their home. In Bankruptcy (and an IVA) the official receiver / insolvency practitioner is only interested in any equity you have in your assets. This means if your house has no equity or you live in rented accomodation you will not have to leave your house. 

If you earn an income where there is disposable money available to pay towards the Bankruptcy then an Income Payment Order may be in place for a total of 3 years.

Debt Myth 7 -Friends / Family can't buy my assets

Friends and family can purchase your assets as long as they are paying a fair price. It's always best to speak to a licenced insolvency practitioner about this before proceeding (especially in an IVA / Bankruptcy).

Essentially, the official receiver / insolvency practitioner wants the equity that's due so it can come from any party.

Debt Myth 8 -You can go to jail for not paying your debt

This is factually incorrect, you cannot go to jail for not paying your debt. You should repay your debt if you can but if you can't then you won't go to jail.

If a judge orders you to make repayments and you refuse then the judge can place you in jail as punishment however this would be for failing to follow a judges orders.

Debt Myth 9 - Your credit file will be damaged forever

If you enter an insolvency solution your credit file will be damaged with a default being added. This default will last for 6 years, after which period you will be able to gain credit and start to improve your credit rating again.

Debt Myth 10 - Bailiff's / Messenger at arms will enter my house

A bailiff (or in Scotland messenger at arms) are only allowed to enter your property if you invite them in.You should communicate with a bailiff / messenger at arms to come to an agreement regarding your debts, this avoids the problem spiralling out of control.

Man in Debt Goes to Extreme Measures: Alternative Debt Advice

Ross Humphries, a man with severe debt problems is facing a three year jail term for agreeing to be a courier of 45 Kilograms of cannabis resin which was worth around £280,000. Mr Humphries received a fee of £250 for his services.

The class B drug was found in Mr Humphries car when he was stopped by police on the M1 in May 2011.

Mr Humphries was a man described as a 'hard-working family man who fell on hard times and got into debt'.


What to do in debt?

It's understandable people in debt may feel stressed and panicked about their debt problems however committing crimes to survive is not a sustainable way solution to debt.

There are numerous debt solutions which people can utilise to resolve their debt problem. These solutions include general money advice, debt management plan, refinance, full and final settlement, IVA, Trust Deed or potentially Bankruptcy.

Sequestration Case Files

Mr & Mrs P have recently received a Charge for Payment. This gives them 14 days to pay their debt of action will be taken. It is now over two weeks since this was received and they are now Apparently Insolvent. This means that they can use the charge for payment to look at Sequestration (Legal name for Bankruptcy in Scotland).

Mr P works full-time but is on a low wage and Mrs P stays at home to look after the kids. Mr P contacted Debt Support Trust about the debt situation they were facing.

There is £21,450 in debt and it is all loans and are in joint names. After considering all options Mr & Mrs P have decided that Bankruptcy is the best option for the them.

They have since contacted the AIB (Accountant in Bankruptcy) to get the forms and these have been handed back and each paid £100 for the cost of Sequestration.

Bankruptcy Case Files

Miss G has run up debts of over £20,000. She lives with her parents and does not have any assets that she could sell. She has one child and has had her income slashed as she has had to go part time.She contacted Debt Support Trust and after all avenues were explored the solution for Miss G was Bankruptcy.

After paying the fee of £450 for the insolvency service for the Official Receiver. As her income decreased she did not have to pay court fee due low wages.

Bankruptcy was then granted. Miss G did not have to pay any money every month as her income is low. Miss G will be discharged from her Bankruptcy after 1 year. Miss G is aware of the impact on her credit file but there was no other solution available to her.

Bankruptcy & Debt Relief Order (DRO)

Bankruptcy is the oldest debt solution and is considered the last resort when facing financial worries. In this article we will discuss a case which led to bankruptcy and how it was dealt with.

Miss G has run up debts of over £20,000. She lives with her parents and does not have any assets that she could sell. She has one child and has had her income slashed as she has had to go part time.

After all avenues were explored the solution for Miss G was Bankruptcy. After paying the fee of £450 for the insolvency service for the Official Receiver. As her income decreased she did not have to pay court fee due low wages.

Bankruptcy was then granted. Miss G did not have to pay any money every month as her income is low. Miss G will be discharged from her Bankruptcy after 1 year. Miss G is aware of the impact on her credit file but there was no other solution available to her.

Criteria For Bankruptcy

- You cannot realistically meet any other debt solution
- Your unsecured debt must be above £750 to enter bankruptcy
- You will need to complete forms provided by The Insolvency Service

Benefits Of Bankruptcy

- You will no longer have to deal with your creditors
- Once your bankruptcy is completed you will be able to start again financially without any debt
- You stop making any payments to your creditors

Negatives Of Bankruptcy

-Your credit rating is likely to be severely affected
-You cannot credit of £500 or more without disclosing you are bankrupt
-You cannot be a director of a limited company
-You may lose your home and car
-There has been some new routes to bankruptcy added over the years, these include;

Debt Relief Order(DRO)- This is only available in England, Wales and Northern Ireland but gives people in severe financial trouble the option of declaring themselves bankrupt without the same cost or hassle. The criteria for a debt relief order is;

Not have unsecured debt exceeding £15,000
- Not have any assets exceeding £300
- Not own your property (i.e. Own a home with a mortgage)
- Not have available disposable Income after normal household expenditure exceeding £50
- Be domiciled in England or Wales, or in the last 3 years have been resident or carrying on business in England or Wales
- Not have been subject to a DRO within the last 6 years

Also, you cannot apply for a DRO if you are currently Bankrupt, in an IVA or have a current Bankruptcy Restrictions Order or Undertakings or have current Debt Relief Restrictions or undertakings.

LILA, Bankruptcy, Certificate of Sequestion

Mr & Mrs P received a Charge for Payment, this gave them 14 days to pay their debt off or legal action would be taken against them. The two weeks past and they hadn't made a payment since this was received which means they were now Apparently Insolvent. This means that they could use the charge for payment as a reason to declare themselves Sequestrated (Legal name for Bankruptcy in Scotland).

Mr P worked full-time but was on a low wage and Mrs P stayed at home in order to look after the kids. There was £21,450 debt and it was all loans which were in joint names. After considering all options Mr & Mrs P decided that sequestration was the best option for the them.

Once they had decided that this was their best route out of debt they only had to wait until their creditors petitioned the county court for the couple to be declared sequestrated.

There is a two new forms of sequestration which now gives the person in debt the chance to declare themselves sequestrated. These new debt solutions are called

- Certificate Of Sequestration - This is similar to sequestration except you don't need to wait for creditors to make you sequestrated and the criteria as follows;

- You must live in Scotland (or have lived in Scotland within the last year)
- You must not have been bankrupt in the last five years)
- Owe at least £1500 in unsecured debt
- You must pay a fee of £100 to submit your certificate of sequestration to the Accountant in Bankruptcy (AIB)
- To receive the certificate you must use an insolvency practitioner (IP) or someone who works for the IP and has been given authority to act on his behalf. You can also visit your local CAB, approved money advisors for DAS or your local authority money advisers
- Only the person in debt can be granted the certificate - creditors cannot apply for this
- On the day the certificate is granted the person in debt then has 30 days to apply for their bankruptcy. All applications made after the 30 days will be rejected and they will lose their £100 fee. The process would then need to start over and a further £100 would be charged.
- The debtor will be required to provide evidence with their application to help the AIB so that identity can be confirmed and that they qualify for the bankruptcy. Acceptable evidence will be payslips, bank statements, proof of benefits if applicable.
- Also required would be tenancy agreements and HP agreements if they have any.
You can get a copy of the Accountant in Bankruptcy Certificate for Sequestration here, however it must be completed by an IP, approved money adviser, CAB or local authority money adviser.


LILA (Low Income Low Asset) - As the name suggests this debt solution is for people with low income and low value assets if any. the criteria for a LILA is as follows;

The criteria to enter Sequestration via the LILA route is;

- Your income must be less than £237.20 based on a 40 hour week
- If you are on income support, income based jobseekers allowance or receiving working tax credits then you would have met the low income test. This will apply even if you are earning more than £237.20
- You must be unable to meet your current repayments and charges
- You cannot own property or land
- The cost for LILA is £100 and is payable to the Accountant in Bankruptcy
- If you get any monetary windfalls or inherit any property or land you would need to let your trustee know as this may need to be paid to your sequestration
- You cannot start up or be involved in the day to day running of a limited company
- You are unable to act as a Member of Parliament. Other restrictions include not being a member of a local council or on a school board etc
- It will be difficult for you to obtain credit after you being discharged