Myth-busting money matters: Making sense of personal insolvency

05 November 2024

Talking about money is never easy, and in today’s world, where new financial challenges seem to be lurking around every corner, it is more important than ever for people to feel confident to seek the advice they need when these financial difficulties arise. Yet many people hesitate, whether out of fear, shame, or uncertainty, and widespread misconceptions about debt only adds to the confusion.

In this blog, we debunk just a few of the common myths around personal insolvency.

Myth: “Seeking advice is a sign of weakness”

Seeking advice for your debt concerns may be daunting but recognising when you need help, and taking action on your debt, is a sign of strength not weakness. Many people delay seeking help because they feel shame, but 92% of debt charity StepChange’s clients say they wish they had reached out for help sooner.

By being proactive and seeking support, you can feel more in control of your situation, reduce the stress of your financial worries, and create a clearer path to a fresh start.

Myth: “If I become insolvent, I will lose everything”

Many people delay seeking debt advice out of fear they will lose all of their assets, but this is not always the case and depends on their circumstances. For example, with informal solutions like debt consolidation or a debt management plan, your assets are typically unaffected as long as you stick to any agreed repayment plan and avoid taking on more debt.

When it comes to formal insolvency processes, in an Individual Voluntary Arrangement (IVA) you negotiate with your creditors to pay what you can afford while keeping your assets, and with a Debt Relief Order (DRO), you can usually keep assets if they do not exceed a certain value. In a bankruptcy your assets will form part of the bankruptcy estate, but there are clear rules about retaining assets for business use, the family home and your income

Each insolvency process has its own rules regarding assets, so it is important to seek professional advice to understand how you may be affected.

Myth: “Entering an insolvency process wipes out all of your debt”

On the opposite side, some people believe their debt will be wiped through insolvency. Entering an insolvency process can reduce or discharge some debts, but it does not wipe them entirely.

In an IVA you will be required to pay a portion of your debt over time, based on what you can afford. In a bankruptcy, there are a number of debts that will fall outside the agreement including student loans, court orders, and child maintenance arrears (if set by the Child Maintenance Service).

Myth: “Insolvency ruins your credit score forever”

While it is true that entering an insolvency process will affect your credit score, it is not permanent. An IVA, DRO and bankruptcy will stay on your credit file for six years after the date of commencement, but that does not mean you can never recover financially. It is likely that your credit score will already have been impacted by not being in a position to repay all of your debts as they fall due.

Over time it is possible to rebuild your credit score by demonstrating responsible financial behaviour. This includes things like paying bills on time and avoiding excessive debt.

Myth: “Being insolvent means you are bad with money”

It is important to remember that debt is not a reflection of your worth or abilities. Anyone can experience financial worries due to factors beyond their control, such as job loss, illness or economic downturns.

There is also a link between mental health concerns and debt. Research by the Money and Mental Health Policy Institute found that almost half of people in problem debt also have mental health issues. Given that one in four people will experience a mental health problem of some kind each year in England, it is clear that lots of people are vulnerable to financial worries. This vulnerability often arises, not from poor money management skills, but from the complexities of life that can impact anyone at any time.

Myth: “Insolvency practitioners (‘IPs’) only work for creditors”

There is a common misconception that IPs only represent the interests of creditors. While it's true that IPs have a legal duty to ensure that creditors are treated fairly, their role is much broader than that. One of the main roles of an IP when it comes to personal insolvency is to act as a mediator between debtors and creditors, aiming to find a fair and workable solution for everyone involved.

Myth: “It is too late to seek help once you are in debt”

If you have built up a significant amount of debt, you are missing payments and your creditors are chasing you, you may believe that your situation is beyond the point of help. This myth isn’t just untrue – it’s harmful. By not seeking advice, you are likely prolonging the inevitable, which may leave you in a worse position later. Seeking advice early can give you more flexibility and options, but it is never too late to get support.

No matter how serious your financial situation may seem, there are lots of options available that can help manage your debt. For more information and guidance, download our free guide.