Credit rating - impact of an Individual Voluntary Arrangement
An IVA will have a negative impact on your credit rating. It's a way to deal with insolvency, which means that you’ve been unable to pay your debts back at the rate that was originally agreed to or that your assets are worth less than your debts. The IVA would show on your credit rating for six years from the day that it started, and would bring your overall credit score down from this point. While it remains on your credit file, you are likely to find it harder to borrow, or that you have to borrow at a more expensive rate, even after the IVA has finished.
Will my IVA affect the people I’m financially associated with?
In most cases, your IVA won't affect the credit rating of other members of your family - it's your IVA, not theirs. However, details of other people who live in your home can appear on your credit report and you can appear on theirs. This means there’s a chance that creditors may connect you and your partners’ names when processing a credit application, and may use what they learn about your finances to inform their decision on your partner’s application.
You can have a financial association with someone through any kind of credit you’ve applied for together and also if you live – or have lived – at the same address at the same time. If you are financially associated with someone, a creditor might look at your credit history when that person applies for credit of some kind.
If you are financially associated with someone else through an account that is now closed, and you don’t want your IVA to affect them, you can apply for a “notice of disassociation”. This is something you request through the credit reference agencies and means that the financial link between the two of you will be officially broken as long as you don’t have any shared active finances, like a current mortgage or a joint account that you’re still using. You will need to contact each credit reference agency separately when you ask them to remove the association. It’s important to note, though, that if your partner isn’t included in the IVA, and you have a joint loan, the creditor would still expect them to make payments as normal.
Providing you have no current financial associations or you have successfully applied for a notice of disassociation, your IVA shouldn’t affect anyone else - even if you took an account out together in the past.
Will an IVA affect my mortgage?
When you start an IVA, your mortgage company or any other secured creditors will receive a copy of the IVA proposal, making them aware of your situation. You also won’t be able to sell or transfer ownership of your property without getting the consent of your IP first.
Depending on the amount of equity in your property, you may have to release your share of it into your IVA by remortgaging it. However, because you are in an IVA, obtaining a remortgage or secured loan is likely to be harder or more expensive as a result of your credit history. If you can’t get either of these, you may have to extend your payments into the IVA, usually for up to one additional year.
If you have a jointly owned property, only your share of the equity will be taken into account and, if your partner is not included in the IVA, their share of equity is theirs to keep. Speak to an expert advisor about your circumstances and they’ll be able to tailor their advice to your situation.
A guarantor loan works by allowing you to take credit out as long as you have someone to co-sign the credit agreement. The person you ask should think carefully about accepting, as your guarantor must agree to pay the money back if you find that you’re unable to. This agreement provides extra security for the creditors.
If you have a debt that has been guaranteed, by a friend or family member for example, this will need to be included in your IVA, as the IVA must include all unsecured debts that you have at the time it starts. This will mean that the company who gave you the loan is entitled to contact the guarantor and ask them to make payments instead. If your guarantor is unable to make these payments, for whatever reason, there is a possibility that this will have a negative impact on their own credit rating.
What happens after the IVA has ended?
In order for your IVA to complete successfully, your IP needs to check that you have paid everything due into the IVA (including additional monies, windfalls and any other assets) and that you have done what was expected of you under the agreed terms. You’ll also need to have completed your reviews and provided all the supporting information you’re expected to.
Any money you’re owed from a Payment Protection Insurance (PPI) reclaim is classed as an asset and would need to be paid into the IVA. In some cases, you may finish paying your monthly payments into the IVA, but it may need to remain open for a time to allow an investigation into a PPI claim to complete and for the money to be paid in. You can avoid this by dealing with your assets – including PPI claims – in good time. When the IVA ends, you will receive your Completion Certificate that proves that your IVA has finished.
Once your Completion Certificate is issued and the solution has ended, the rest of any unpaid unsecured debt that was included in your IVA is written off. A copy of your Completion Certificate is also sent to the Insolvency Service and your details will be taken off the Insolvency Register three months after the date your IVA ends.
If you apply for credit after your IVA has finished, you may find your application is still affected. Creditors use your credit history to determine the level of risk they’re taking by lending to you. Your IVA will remain visible on your credit history for a minimum of six years and however long it lasts, and because lenders can see it, they may be unwilling to lend to you. Alternatively, they may agree to lend to you but at a higher rate than advertised.
Of course, if the IVA was completed successfully you will find yourself in a position where your unsecured debts included on the arrangement are wiped clean and you can make a financial fresh start. This is definitely good news, as the money that you were putting into the IVA each month will now become yours to do with as you wish, giving you a new sense of financial freedom – so you may feel you don’t need to borrow anyway.
When will I be able to borrow again?
Even though the IVA will show on your credit history, it doesn’t mean that it will be impossible to borrow in the future.
There are steps you can take to try to repair some of the damage to your credit history. If you keep very careful track of your finances after the IVA is over and make sure you stay on top of your bills and any financial commitments that weren’t included in your IVA, there’s no reason why you won’t be able to borrow again and even apply for a mortgage. However, you may have a greater chance of being accepted if you apply to a mortgage provider who specialises in customers with poor credit histories.
After your IVA has finished, you could borrow again to show you can pay it back in full and on time every month. For example, you may choose to pay for things using a credit card with a low credit limit and, preferably, pay off the balance in full each month. Doing this helps to shows that you’re a responsible borrower, which will go in your favour if you apply for more credit, like a mortgage, in the future. Remember though, if you miss payments this will harm your credit history further.