Do You Know These 5 Common Debt Myths?

There are alternatives to bankruptcy for people in debt, and a professional can help you explore those options (Getty Images/JGI/Jamie Grill)

Talking about debt can be emotional, evoking a range of feelings from guilt to fear that date back to childhood when our relationship with money begins to form.

Understanding debt and its vicious circle is also full of misconceptions about how we got here and how we can find a way out.

Here’s a breakdown of five common debt myths and how to avoid falling in love with them.

MYTH 1: IF I HAVE DEBTS, I AM A BAD PERSON

Associating net worth with self-esteem is common and wrong, notes Stacy Yanchuk Oleksy, CEO, Credit Counseling Canada.

This attachment, she adds, fuels feelings of shame and embarrassment in people in debt and can lead to feelings of worthlessness, hopelessness and avoidance. Afterward, they may rack up more debt or seek quick fixes instead of longer-term interventions, she explains.

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“When people are in debt, the first thing they do is feel stupid. They start to squirm a bit and look for solutions that are not necessarily good for them,” she says.

To avoid this pitfall, work with a professional to assess your financial situation and find an organized solution that tackles problems one step at a time, recommends CPA Michael Massoud, director, finance and controller for CPA Canada and volunteer for the organization’s financial literacy. . “Seeking personalized debt management advice can potentially provide solutions that you might not have thought of,” he says.

MYTH 2: IF I CAN MAKE THE MINIMUM PAYMENT, I CAN AFFORD TO CONTINUE SPENDING

Minimum payments go mainly to interest (depending on its rate), without affecting the principal balance, warns Yanchuk Oleksy.

“This is where you enter the never-never plan where you can never pay off the balance,” she says.

If you are unable to pay a balance in full, Yanchuk Oleksy recommends paying even $5 more than the minimum payment to stop the cycle of debt.

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To limit spending on non-essential items, consumers need to identify triggers or bad habits. For example, if shopping online while watching TV leads to unnecessary purchases, avoid storing credit card numbers on devices and set yourself a weekly allowance.

“Knowing your financial temptations and weaknesses will help you avoid them,” says Massoud.

MYTH 3: BANKRUPTCY IS MY ONLY OPTION

Yanchuk Oleksy concedes that those who have already refinanced, consolidated debt or been turned down for a loan can expect the worst.

She advises those in this situation to take a step back (and take a deep breath) and explore all possible and possibly unfamiliar avenues before heading in this direction.

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Other options include managing debt independently with a financial planning overhaul. This involves strict budgeting, selling assets, increasing revenue and/or decreasing expenses. “It’s clearing your way,” she explains.

The second option is to seek help through services, including nonprofit credit counselors, to develop a long-term strategic plan to pay off the debt.

“As people understand the information, they often come to the conclusion that the situation is not as bad as they thought,” Massoud explains. The third way is legal, in the form of bankruptcy or a consumer proposal, which should be a last resort, he adds.

MYTH 4: I’M NOT HOOKED FOR JOINT DEBT

Those who participate in joint or co-signed loans – whether to buy a house, a car, or to help out a family member or friend – should remember that if either party defaults on their part of the financial agreement, the other party is responsible for that.

“Let’s say my brother and I have a joint loan. If he doesn’t pay, I have to make the payments,” says Yanchuk Oleksy. “Similarly, if I become a co-signer on a loan because my brother doesn’t have good credit, but I do, if he goes bankrupt on that debt, I’m still responsible for that debt in its full amount.”

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Massoud recommends entering financial relationships with caution, ensuring there is trust between the parties and being prepared to accept the consequences if something goes wrong. If a relationship ends, he adds, make sure the names of those no longer responsible for the debt are removed from the agreements.

“We encourage consumers to be very careful when associated with debt,” he adds. “You have to plan your life by taking yourself or another person by the knees.”

MYTH 5: IF MY SPOUSE OR A FAMILY MEMBER DYES, THEIR DEBT WAIT FOR ME

There are scenarios where people assume they are responsible for someone else’s debt, when they are not.

For example, if a loved one, such as a parent, dies, the next of kin, whether a spouse or child, is not liable for any debt held by that person if it is not joint or co-signed.

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Instead, Yanchuk Oleksy explains, this debt is paid through the estate of the deceased. Any debt that cannot be paid through the estate is rejected.

“Debts die with the person unless they are joined or co-signed,” she says. “If the estate can’t afford it, then the creditors simply lose. They can’t go after the kids or anyone else.

Similarly, she notes, life insurance policies held by the deceased that identify a direct beneficiary are not assumed by the estate, but rather are paid directly to that named person. “It also replaces creditors,” she says.

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