If you’re struggling with debt, you may have heard of an IVA (individual voluntary arrangement). An IVA is a formal agreement between you and your creditors to repay your debts over a set period of time.
The benefits of an IVA include:
- reduced monthly payments
- no interest on outstanding balances
- the ability to keep your home and car
- protection from creditor harassment
An IVA will show on your credit report and thus affects your ability to apply for credit during the IVA period. This article looks at what an IVA is, how it works and how long it stays on your credit report.
What is an IVA?
An IVA, or individual voluntary arrangement, is a legal agreement between an individual and the people they owe money to. It allows the individual to work out a payment plan that helps them to avoid bankruptcy while still giving the creditors the opportunity to recover some of the money they are owed.
An IVA prevents you from falling further into debt, from increased interest charges and fees. It also gives everyone involved a clear timeline for repayment of the debts.
Specifically, in an IVA, the debtor sets aside an affordable portion of their income that is distributed among their creditors on a monthly basis until the end of the agreement. While there are certain eligibility requirements for entering into an IVA, including restrictions on who can file and how much debt you need to have in order to qualify, it is often seen as a preferable alternative to bankruptcy since it allows debtors to take more control over their financial situation.
After the IVA ends the debt will be considered completely paid off, even though the amount you have paid is often lower that the actual debt.
IVAs are legal agreements which must be arranged by an Insolvency Practitioner. The IVA needs to be approved by a court and will then be recorded on the Insolvency Register.
Debtor – The person who owes the money
Creditor – The lender who is owed the money
How does an IVA affect your credit rating?
An individual voluntary arrangement, is a legal binding contract that provides protection for debts that have become difficult to pay back. Once you enter into this arrangement, your creditors must cease all fines and fees against you and your debt will be settled over a set period of time. Although an IVA is intended to improve your financial situation by managing outstanding debts, it will also affect your credit rating in several ways.
One of the main factors that influence your credit score is the length of time you have had established credit accounts or loans. Unfortunately, those who enter an IVA generally experience an increased number of credit applications due to their bad financial standing prior to entering into the agreement. As a result, lenders may see these individuals as potential high-risk borrowers and are therefore less likely to offer them new lines of credit. Additionally, any new debt obtained while you are in the midst of completing an IVA may cause damage to your overall credit score, as this action indicates poor money management despite working with creditors.
An IVA will show on your credit report and will cause your credit score to go down.
A lower score means that you will find it more difficult to obtain credit. You will only be allowed to borrow £500 during the IVA. If you need more than this then you will need approval from your Insolvency Practitioner (IP).
Don’t forget that applying for a joint mortgage when one of you has bad credit/IVA will be more complicated.
How long does it stay on your credit report?
An IVA typically will last for five years and involves making regular monthly payments towards your debts. However, one common concern for many people considering this type of debt solution is how long the IVA will stay on their credit report.
While it’s generally best practice to maintain a good credit history wherever possible, debt solutions like an IVA are not reported on your credit report indefinitely.
Your IVA will appear on your credit report for six years from the date it was approved.
So if your agreement has a term of five years, it will show on your credit report for a further 12 months, making six years in total.
Should you be in a position to finish your agreement early then the IVA remains in place but will be marked as ‘complete’.
Even though your credit file will not show the IVA after six years it is common for lenders to ask if you have had any credit issues. The best course of action here is to be truthful about what happened and explain why.
Can I still get credit with an IVA?
Should you require credit during the IVA period then the available choices will be limited and expensive.
Many applications to different lenders will only make your credit position worse. Before this, get a copy of your credit report and see what’s showing.
Applications that require a hard search will affect your credit score, but companies that just do a soft credit search do not leave a footprint on your record.
While your IVA is live you can only apply for upto £500 credit without needing your IPs written approval.
Is it possible to have an IVA removed?
It’s not possible to have it removed. The IVA will be removed automatically at the end of six years.
If this does not happen, or you notice an error, then you need to approach the credit reference agencies and ask them to alter the record. It is possible to add a note to your report, this could provide an explanation of how the debt situation started.
What happens after an IVA?
At the end of the six year period your IVA will no longer show up on your credit file. However, your credit position will be weak and needs time to recover.
To help with this you should make all your bill payments on time and check that you correctly appear on the electoral roll.
Check your credit report from time to time to make sure it’s accurate. Managing your money well and keeping loan and credit applications to an absolute minimum will help.
What are the mortgage implications?
Mortgage lenders look at your credit file when they are underwriting and assessing a mortgage application. During the IVA period there won’t be much going on, as your ability to apply for credit is restricted.
It is possible to get a mortgage, although you may not be considered for the lowest mortgage rates. There are specialist lenders that are willing to consider borrowers with past credit issues but a successful application will also depend on having a strong income position and a good deposit.
Rather than applying direct to a lender, we would recommend speaking with an independent mortgage broker and giving them a copy of your credit report to look at. They will then be able to suggest some lenders to approach.
Checking your own credit report
Checking your own credit file will let you see what’s showing on your file and what isn’t. Simply taking a look at your credit history won’t affect your score or leave any detrimental information behind.
Because each of the three main credit agencies hold slightly different data it is prudent to check all three. You’ll be able to look for any mistakes or spot entries that may be fraudulent and related to identity theft.
If you are short on time then go for Experian as they are the biggest or use CheckMyFile who can conveniently access all three on your behalf.
In summary
We were looking at how long an IVA stays on your credit report.
An individual voluntary arrangement will show on your credit file for six years, even though the actual payment agreement could be for less.
If you are able to pay it off early this will change the status on your file to ‘completed’ but you cannot remove the entry before the end of the six year period.
FAQ
Frequently Asked Questions
Who would need an IVA?
Someone who has no or little savings, has unsecured debts over £5000 and finds the repayments unmanageable, despite having a regular income.
Can an IVA be paid off early?
Yes. If you have a lump sum available then this could be used to settle the IVA early.
Who can see my IVA?
Your IVA will be recorded on the Individual Insolvency Register, which is accessible to anyone.
Will I need a specialist mortgage lender?
Yes, most likely. Even after your IVA has ended you should still declare it to a new lender. An experienced broker will be able to help you.
How much does an IVA cost?
Insolvency Practitioner fees do vary but 15-18% of the amount to be paid back is normal. This is taken from your agreed monthly payments, not on top of them.
How would a mortgage broker help me?
Firstly, by speaking with a specialist mortgage broker they can explain what is on your credit file and how it affects you. Then they will search to find a suitable mortgage.
