I have been reading a great article on debt myths over at MoneyPlus and it has really made me think how easy it is to be misled on issues of debt.
Let me share of a few of the debt myths they bust in their article and tell you how some of these impacted me. Hopefully you will find them useful too.
Myth #1 – Bad credit ratings affect the people you live with.
In general, your credit rating should not directly affect the credit scores of people you live with, such as family members or roommates. Each individual has their own credit report and score, which is based on their own financial history and behaviour.
However, there are a few scenarios where your bad credit could indirectly impact those around you:
- Joint Accounts: If you have joint financial accounts with someone (e.g., a joint credit card or a joint loan), their credit could be affected by your poor credit behavior. Both parties are responsible for the joint account, and any negative activity will impact both credit histories. This happened to me as my partner at the time had bad credit and it impacted the kind of account we got and our overdraft capacity
- Co-Signed Loans: If someone has co-signed a loan for you, such as a family member or friend, your credit behaviour on that loan will affect their credit score. If you make late payments or default, it could harm their credit.
- Shared Living Expenses: While not directly related to credit scores, having a poor credit history may affect your ability to contribute to shared living expenses, such as rent or utilities. This, in turn, could create financial stress for those you live with.
Myth #2 You will face prison if your debts are not paid
I know this is a concern many of my readers have shared over the years but the truth is this only happens very rarely.
. If you fail to pay council tax, a criminal fine, child maintenance arrears, or business rates, then a prison sentence can be enforced. But this is used as a last resort after other action has been taken against you and failed and it is really unusual.
Here are some more common actions that could be taken if your debts remian unpaid
- Collection Agencies: Creditors may hire collection agencies to recover the debt on their behalf. These agencies may employ various methods to encourage repayment, but they cannot arrest you.
- Legal Actions: Creditors may take legal action to obtain a judgment against you. This can result in a court order to pay the debt, and if you fail to comply with the court order, there may be consequences such as wage garnishment or placing a lien on your property.
- Bankruptcy: In some cases, individuals facing overwhelming debt may choose to file for bankruptcy. This is a legal process that can help eliminate or restructure certain debts, but it has its own implications.
#3 Your family needs to pay your debts off when you die
This isn’t true unless you have savings or assets to sell off, your family do not need to pay your debts when you die. So it is your estate ( you assets, savings etc) that is reposible for your debt not your family.
Here’s how it typically works:
- Estate Settlement: After someone passes away, their estate goes through a legal process called probate (or a similar process, depending on the jurisdiction). During probate, the deceased person’s assets are used to settle outstanding debts.
- Priority of Payments: There is a specific order in which debts are paid from the estate. Secured debts (backed by collateral, like a mortgage or a car loan) are usually paid first, followed by unsecured debts (like credit card debt). If the estate doesn’t have enough assets to cover all the debts, some debts may go unpaid.
Joint debts are different though – if you have a joint debt, the person(s) you share this with will be liable for the full remaining balance. Try and avoid joint debts where possible for this very reason!
Take a look at these debts after death facts to find out more about this.
I hope this debt myth busing has proved useful to you. Pop over to the MoneyPlus article mentioned above to read some more!
