Individual Voluntary Arrangements, or IVAs, are a popular method of consolidating debts. It is generally used as an alternative to filing for bankruptcy, and is governed by the Insolvency Act 1986. It is basically a payment proposal which is presented to a debtor’s creditors to reduce repayments in order for the debtor to continue to pay. It is a contractual agreement entered into with creditors, and can be based on capital, income, other payments or a combination of these elements.
They might be a commonly-used debt consolidation method, but how do they affect your credit rating? Many people are concerned that entering into an Individual Voluntary Arrangement will lead to being blacklisted by lenders or have a reduced credit rating.
Every adult in the UK has a credit rating and history, and this score is made up of a number of factors, and is individually calculated by each lender. That means that your credit rating will change every time you apply for credit, and is based on a variety of factors including age, employment status, marital status as well as credit history.
Banks will always refer to a client’s credit history or file when determining their credit rating. This will include every application for credit ever made, as well was as other finance agreements or late payments. There are two main credit reference agencies in the UK, and anyone can obtain a copy of their own credit file by applying to these agencies online.
If you enter into an individual voluntary arrangement then this will appear on your credit history in the future, and once it is completed (i.e all the creditors paid) the Insolvency Practitioner will provide a Certificate of Completion. If you send this to the credit agencies then they can update your credit file to note that the IVA was completed.
Once you have completed the IVA you will be debt-free, and your credit history should show this. It might take longer to have other items removed from your credit file. It can take a long time to clear your credit history, and an IVA will have an impact on your credit rating for six years, but this doesn’t mean you will necessarily be turned down credit.
IVAs cane be settled with a lump sum, and this makes a lot of sense was it means you will pay back less overall to your creditors, but they will be happier to receive the payment sooner rather than later. While an IVA typically lasts for five years, if you come into some money then you should be able to settle the outstanding debts instantly, leaving you with no payments still to make. IVAs are a good way of getting on top of your debt.