An IVA can lower your credit score and negatively impact your personal and professional life. However, an IVA can also help you get your finances back on track if you manage it correctly.
Let's look at what an IVA is and how it affects your credit rating.
An individual voluntary arrangement (IVA) is a legal agreement that enables you to settle your debt obligations with manageable installments over a fixed period of time, typically five or six years.
At the end of your IVA, any outstanding unsecured debt will be written off. A lump-sum IVA, often known as a one-time payment, is also a debt solution option.
Here are some of the benefits of an IVA:
You get to make affordable monthly payments, usually over five or six years.
If you own a home you'll be able to keep it as long as your mortgage is up to date.
There are no upfront fees.
Fees set up by your creditors will be paid as part of your monthly IVA payments.
If you have a lump sum you can offer it as a once-off payment.
After your IVA is complete, any remaining unsecured debt is written off.
There are some drawbacks to IVAs, including:
You may need to re-mortgage your home if you have equity in your home.
Although rare, if your IVA fails creditors may petition you for bankruptcy.
Not all creditors may agree with your IVA.
IVAs are recorded in the public register.
With an IVA in place, your spending will be restricted until the IVA ends.
It is important to understand how an IVA can affect your credit rating and you should always get expert debt advice if you want to find out if an IVA is right for you.
Keep in mind that you can only get an IVA with the help of an insolvency practitioner.
To apply for an IVA you first need to determine if it's the right option for you. If it is, you need to work with an insolvency practitioner to set up the process - you can find one by searching theInsolvency Practitioners Association.
Yes. An individual voluntary arrangement will negatively affect your credit score.
IVAs are a form of insolvency, and they will appear on your credit report for six years after they start. You might also find it challenging to get credit during this time.
If you intend to take out more than £500 in credit during your IVA, you must also let your insolvency practitioner (IP) know and acquire their written consent.
A public register called theIndividual Insolvency Register contains information about individual voluntary arrangements. Although it's unlikely that anyone would discover this information, it should nevertheless be taken into consideration.
An IVA will affect your credit rating in more than one way:
You may struggle to get approved for credit while you have an IVA.
You have to get written permission from your IP if you want to take out more than £500 credit during your IVA.
Your IVA will be disclosed to your creditors. This extends beyond banks; your municipality, mobile phone provider, and utility providers (such as gas, water, and electricity companies) will also be informed if you owe money to them. If you work for yourself, your IVA will be disclosed to HMRC and your business creditors.
As mentioned above, your IVA's details will be listed on the IIR, which is accessible online by anyone. Although it's unlikely that friends or colleagues will access it since most people who work with this register are those in the credit or insolvency business.
An IVA will be noted on your credit reference file for up to six years after it was granted. Credit reference agencies will typically automatically remove this information after six years.
An IVA will remain on your credit profile for six years and during this time you can't do anything. However, when the IVA completes, it will automatically be marked as 'complete'.
In some cases, it's possible to add some details to the reason behind your insolvency practitioners association to your credit record. You can ask the company to add a note on your credit report to explain your circumstances, like an illness or retrenchment.
You can attempt to obtain credit during the duration of your IVA agreement, but your IP must approve these requests.
Keep in mind that your IVA and credit score will limit your borrowing capacity for six years, making it difficult to get credit.
However, once your agreement expires, you can start responsibly rebuilding your credit profile by getting small, manageable amounts of credit at a time.
After your IVA, you might be tempted to apply for credit to raise your credit score. However, this may be quite expensive and challenging to repay.
You can take further steps to repair your credit score both during and after your IVA:
Check your credit report often so you can see any errors or outdated information.
Register on the electoral roll to help future lenders confirm that your personal and contact information is correct.
Pay your bills on time because your credit report may reflect how you handle payments for things like gas, electric bills, and mobile phone contracts.
The IVA will remain on the IIR until the agreement is completed but your credit report will still show this for up to six years. So it's important to know this if you want to apply for credit in the future as it will be harder to borrow money with an IVA noted on your credit profile.
If you have a low credit score or a short credit history you may see a lot of credit card offers to encourage you to apply for a credit card. However, it's not recommended to take out more debt before clearing your existing debt. Be cautious about taking on new debt and always discuss it with your insolvency practitioner.
An individual voluntary arrangement can be a good way to manage your debt and get your credit profile back on track. If you struggle to pay debt of at least £5,000 or more to at least two creditors, an IVA could be a good option for you.
There will always be fees associated with setting up an IVA, regardless of who arranges it. Before an IVA is approved all fees are agreed upon by both you and your creditors. For example, if you work through StepChange.org, there won't be any fees to pay if you decide at any point not to proceed with an IVA.
You will likely not pass a credit check when you have an active IVA. This makes it difficult to obtain credit, but on the other hand, it's not recommended to apply for any further credit until your IVA is complete.