Once you declare yourself bankrupt you're bankrupt for life ...

... and the four other damaging mistakes we make about debt

Updated: 


Almost two fifths of people believe if they declare themselves bankrupt, that's it ... they're bankrupt for life. Bang goes your chance of ever buying a house, getting a credit card or even being in control of your own spending. This is terrifying - particularly because it's completely wrong.

The finding emerged as part of a study by vouchercloud into how much we understand about debt. The research revealed the five most popular misconceptions - and if they are allowed to fester, they could end up causing serious harm to people's finances.

1. If you ignore the company you owe money to for long enough, they'll go away and the debt will be cleared

A shocking 42% of people thought this was true. In fact, what will happen is that your debt will be passed to a debt collection agency, who will add their fees and costs and start chasing you. If you ignore them, they'll add court fees and take you through a legal process to collect the money. The total cost of your debts can easily double depending on how long you leave it and how much you owe, and you will create a stain on your credit record that will take years to overcome.

If you owe money and you cannot afford to repay it then absolutely the worst thing you can do is ignore it and hope it goes away.

2. Once you declare yourself bankrupt, you're bankrupt for life

Some 39% of people thought this was true. Bankruptcy is certainly a very serious step to take. The official receiver has the power to sell any assets in order to pay as much of your debts as possible - so you are highly likely to lose your home and any valuables (although you may be able to keep your car). They will remove any access to borrowing, and will require you to make monthly payments from your income for up to three years.

However, the process of going through bankruptcy only actually takes a year. After that, you will still live with the effects of it, but you will no longer have any debts. The longer-term effects shouldn't be underestimated. The bankruptcy order stays on your credit record for six years, and even after that some lenders will refuse to lend to anyone who has ever gone bankrupt.

However, there is light at the end of the tunnel. With a responsible attitude to borrowing, after those six years, you should be able to rebuild your credit history - and be free of the effects of bankruptcy forever.

3. I'll lose my home if I miss a mortgage payment

It's a terrible idea to miss even a single mortgage payment, but you won't lose your house on the spot. If you have absolutely no choice but to miss a payment, you should contact your mortgage company as soon as possible to discuss your situation. In some cases they will arrange a payment holiday, or reduced payments until an immediate crisis has passed.

Even if you cannot work something out with your lender, you will have a while to get things back on track before there's a risk you will lose your home. It's not in the mortgage company's interests to have to go through the rigmarole of repossessing your home and selling it to recoup the money they lent you, without giving you a chance to put things right.

Of course, the longer you leave things, the harder it will be to get back on top of payments, so if this isn't a very short-term issue, you need to speak to a debt charity as quickly as possible to work out the best solution to your financial problems.

4. All debt is bad for your credit rating

Some 33% of people think this, but it's far from true. Lenders actually like to see you borrow a modest amount - without maxing out your cards. They then want to see you meet all your repayments, so they have proof you have a history of borrowing and repaying.

Ironically, if you never borrow anything, they have no proof you'll be dedicated in repaying any loans, so they'll be more worried about lending to you.

5. Banks will give you a mortgage based solely on how high your salary is

More than a quarter of people thought this was true (27%). Its likely that people have picked this up from rough rules of thumb about how much mortgage companies have tended to lend in the past. However, their decision whether or not to lend (and how much) depends on a huge number of things.

They will look at overall affordability - including your income and outgoings. They'll consider affordability if interest rates rise, and if your lifestyle changes. They'll look at your credit record and how responsible you are with debt, and they'll factor in their own (secret) priorities related to you, the mortgage business, and the property.

If you want to be sure of securing a mortgage, you need to work on building a decent credit record, getting your expenses under control, and sticking with your employer for long enough to build up a decent record of employment. Your salary will be factored in - but it's not the be-all-and-end-all.

As Chris Johnson, Head of Operations at vouchercloud.com, points out, it's important to know the reality behind the most common misconceptions. However, it's also important to understand the impact of borrowing, and the effects of missing payments, before we go anywhere near a credit card, loan or mortgage.

He said: "Britons needs to educate themselves on all matters of debt, whether it currently effects them or not – because it might do one day. Credit cards, loans, mortgages, every type of debt, whether considered a good or bad, can land you in trouble if you don't fully understand the legal agreement that you're entering into."

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