Rumours about debt: be careful who you listen to
14/02/2008
When we listen, we learn – but what exactly are we learning? Listening to rumours is always risky, and when they concern complicated issues with potentially serious consequences, the wrong advice could easily make a bad situation worse.
The issues that generate the most rumours, of course, are the ones that affect people’s everyday lives, so it’s no surprise that we’re surrounded by myths and rumours about debt. Let’s look at just five of them.
Myth #1 “Start by paying off your high-interest debts.”
It’s true that you should put your spare cash towards your highest-interest debts – but the key word here is ‘spare’. On a monthly basis, money is only spare if it’s not needed to pay off any of your commitments, from mortgage / rent to water bills and credit cards.
If you ignore some bills to pay off others more quickly, you could end up being taken to court, evicted or even imprisoned, depending on the type of debt you’re dealing with.
Myth #2 “Lenders won’t lend to anyone on the credit blacklist”
Creditors make up their own minds about granting you credit when you apply. Your credit report (maintained by credit reference agencies) will show them how you’ve handled your finances in the past. Although this will certainly influence their decision, it won’t tell them what that decision should be.
So there’s no ‘credit blacklist’ as such, but if you don’t look after your finances you’ll probably find that some creditors won’t give you credit, or will charge you more for it.
If you’re already in that situation, any adverse entries on your report (such as CCJs, arrears and defaults) will remain there for six years. You can’t have them removed before that time – unless the information is incorrect – but if you pay what you owe, they will be marked as ‘satisfied’. A ‘satisfied’ entry will show creditors that you’ve had some financial troubles, but you’ve now dealt with them.
Myth #3 “Debt consolidation is the same as debt management.”
Debt consolidation means paying off your existing debts with a new loan. Payments to the new debt could be smaller because the interest rate is lower, because the new debt is paid back more slowly, or both. However, the longer the repayment period, the longer you’ll be paying interest – so consolidating your debts could cost you more in the long run.
Debt management involves negotiating with creditors, looking for an affordable way to repay your existing unsecured debts. Some people do this themselves; others get a professional debt management organisation to do it for them. Some debt management organisations provide advice and self-help packs, while others will play a more active role: distributing payments to creditors and negotiating with them, asking them to accept lower monthly payments, freeze interest and waive charges.
Myth #4 “Bailiffs are just debt collectors with a different name.”
There’s a big difference between bailiffs and debt collectors.
Debt collectors collect money from people who aren’t paying their debts in the way they agreed. A debt collector can work for a creditor, collecting funds on their behalf. Or they might buy the debt from the creditor, which means the money is theirs to keep – if they can collect it. Either way, they must obey the same rules as the original creditor. It’s illegal for them to enter your home without permission, or to pretend to be court officials or bailiffs.
Bailiffs, on the other hand, are authorised to take away some of your possessions so they can be sold to pay your debts, although they’re not allowed to take essential items, children’s toys, or things that you can prove do not belong to you. On their first visit, they’re only allowed to enter your property if you let them in or if they find an unlocked door or window. But once they’ve been in, they have the legal right to force entry on any subsequent visits regarding that debt.
Myth #5 “An IVA is an easy way of avoiding bankruptcy.”
They’re both serious matters and both will seriously affect your credit rating. IVAs and bankruptcy are legal procedures that allow insolvents (people who are unable to pay off their debt) to ‘write off’ some of what they owe so they can clear their debt and make a fresh start.
An IVA might be better for homeowners, as it’s very unlikely they’ll be forced to sell their home – although they might have to release some equity in it. It could also suit someone who wants to keep their debt problems to themselves, as an IVA doesn’t get publicised or bar people from certain careers (as a bankruptcy does).
Bankruptcy normally takes one year, as opposed to the five years an IVA usually takes. If your debts are huge, your income is very small and / or you have no property to lose, bankruptcy may be the more appropriate solution for you.
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