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Living on a debt solution

Can I borrow while I’m on a debt solution?

Posted 07 March 2017

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It’s sometimes possible, but might not always be advisable. Read on to learn more.

Before you start a debt solution, it’s important to know what life will be like while you’re actually on it. If you’ve spoken to a trained debt advisor and they’ve recommended you start a debt solution, you might be wondering whether you will be able to borrow while it’s ongoing. Let’s look into this area in a bit more detail.


It depends on the solution


Whether or not you’re allowed to take out extra credit depends on the type of solution you start. For instance, a Debt Management Plan (DMP) is not classed as a formal solution, so there are no rules stating that you’re not allowed to borrow more while you’re on a DMP. However, it still might not be a good idea to do so.


If you have had to start a DMP, it means you’re not able to carry on paying your unsecured debts back at the rate you originally agreed to. In this situation, it’s best for you to concentrate on paying your existing debts back in an affordable way on the DMP, rather than taking out even more credit and putting your plan at risk. Added to this, if your creditors see that you keep adding extra debts, they are less likely to freeze the interest and charges on the debts included on the DMP. It's also worth saying that if you borrow money that you know you won’t be able to repay that could be classed as fraud.


An Individual Voluntary Arrangement (IVA) works differently. An IVA is a formal arrangement and this means that the rules set out in your proposal (once it’s been accepted by your creditors) are legally binding for both you and them. You are not allowed any further borrowing on an IVA at all without your Insolvency Practitioner (IP) agreeing first. You’d only get permission to borrow if it was for a good reason, if it didn’t put your IVA at risk and there would be no allowance made for this new debt in your expenditure. Breaking the rules of your agreement by borrowing when you shouldn’t could put your IVA at risk of failure.


As well as this, your solution provider is likely to advise you not to take any extra credit out. This is because it will take you longer to pay off your debts, and they don’t want you to take a backwards step and end up not being able to afford your payments on the solution.


Look into taking a break for emergency expenditure


Just because you might not be able to borrow while you’re on a debt solution, this does not mean you’ll be stuck if an unexpected expense comes along. There is flexibility built into debt solutions which allows you to take a break for emergency expenditure.


If an unexpected expense comes along, be sure to get in touch with your solution provider as soon as possible and let them know about it. You’ll be asked to provide evidence of the unexpected expense and then your solution provider will tell you if you can take a break from your payments or not.


Your credit history


When talking about debt solutions and borrowing, it’s important to mention the effect that starting a debt solution will have on your credit history. When you apply to borrow money, or for certain services, like a mobile phone contract or tenancy agreement, the company in question will run a credit check on you. This is so they can check how successful you have been in paying back money in the past.


Starting a debt solution requires you to stop making your contractual payments to your unsecured debts – so that your payments can come down to an affordable level. This also means that you will be breaking the agreement you signed when you first took the credit out. So starting a debt solution will have a negative impact on your credit history. Usually with debt solutions, this effect will last for six years from either the date that you start the solution, or if your creditor issues a default at any point, your credit rating will be damaged in the same way for six years.


You may find that getting approved for credit becomes harder because of the damage to your credit history and/or that you have to pay a higher rate of interest if you are approved for borrowing.


Can I get a mortgage while on a debt solution?


The likelihood of being able to get a mortgage while you’re on a debt solution is small. This is mainly because of the effect the solution will have on your credit history.


A solution like a DMP or IVA, will require you to make a regular monthly payment towards your debts. This payment is based on what you can afford, known as your disposable income. If you were to take on a mortgage that was more expensive than your current rent, you’d have less money to put towards your debt solution and may find it hard to maintain your payments.


If your creditors agreed to you taking on a mortgage, you may struggle to find a lender that will accept you.


Borrowing after your solution


Although it may not be a good idea to borrow while you’re on a debt solution, this does not mean that you’ll never be able to borrow again, or qualify for a mortgage. Once you’ve finished your debt solution, get some advice from your debt solution provider about how to go about improving your credit score. There are also companies that specialise in providing mortgages for people with poor credit ratings, which you can look into once your solution has finished.


In the end, you may just need to wait a little, while your credit score improves and till you’re in a more secure financial position, before you apply for a mortgage or to borrow again.


For personalised advice about your debts, you can get in touch with one of our advisors using the options at the top of the page.

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.