IVA - how will my credit rating be affected?

18 June 2009

An IVA (Individual Voluntary Arrangement) can offer an alternative route out of debt for people facing bankruptcy.

However, if you`re thinking about entering into an IVA, you might be concerned about the effect it may have on your credit rating. Here`s a look at how an IVA works, and how your credit history may be affected.

How an IVA works

An IVA is a legally binding agreement between you and your creditors. It allows you to avoid bankruptcy by repaying an agreed percentage of your unsecured debts, after which the remaining debt will be written off.

Before you can enter into an IVA, you will first work with an Insolvency Practitioner (IP) to draw up an IVA proposal. Creditors accounting for at least 75% of your total unsecured debt must agree to the terms of this proposal for the IVA to go ahead.

If the terms are approved, you will begin making monthly payments to your IP, who will subsequently distribute the agreed amounts between your creditors. This will usually continue for five years.

There are some things you should consider before entering into an IVA, though. You may be expected to give up some of any increase in salary while the IVA is ongoing, and if you are a homeowner, you may also be required to release some of the equity in your home in the final year of the IVA.

On successful completion of the IVA, you will be legally debt-free.

How does an IVA affect my credit rating?

An IVA is a major financial commitment, not to mention a change from your original debt repayment terms - and it will have a significant impact on your credit history.

When you first enter into an IVA, you will effectively default on the debts that the IVA covers, and this will be recorded on your credit history. Like any other activity involving credit, this - and the IVA itself - will stay on your credit history for six years, meaning that you may struggle to obtain credit for a year after the IVA has finished.

The terms of an IVA will usually allow you to borrow a small amount (normally up to around £500) without notifying your IP. However, because an IVA will show on your credit report, it is likely to make it very difficult to borrow until after it has disappeared from your credit history.

The impact on your credit rating is just one reason why you should only enter into an IVA if you are sure it is the best debt solution for your circumstances. If you`re unsure, a professional debt adviser can discuss your situation with you and help you to decide.

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