Can I get credit with an IVA?
Credit plays an important role in our modern life and helps us achieve financial security. It allows us to get the things we need for our lives to run smoothly and at the same time provides us opportunities for success in life.
However, credit can cause significant problems when you discover you are unable to pay off your debts as you anticipated. In fact, according to the National Audit Office, more than 8 million people in the U.K. are unable to pay their debts. For individuals, wishing to avoid bankruptcy, this is where alternative solutions like the Individual Voluntary Arrangement (IVA) come in.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement with your creditors to pay them back over a certain period, usually 5-6 years. An IVA offers you a flexible and affordable method to repay all your debts under one management plan, and still have some type of control of your financial affairs.
Your Insolvency Practitioner will work with you to draft an IVA proposal, which involves a reduced payment scheme, to take to your creditors. If your creditors accept your proposal, it becomes legally-binding straight away. You will have to make regular payments to your Insolvency Practitioner, who in turn divides the money between your creditors as per your IVA.
An IVA freezes up any further interests/ charges on your outstanding debt balance and stops your creditors from taking up any further actions against you. It also provides you with a sustainable debt repayment plan by consolidating all of your debts into one monthly lump payment you can afford. The amount of the lump payment you should pay is calculated after your necessary expenses have been catered for and a basic monthly household budget has been set aside.
Getting credit during an IVA
If you’re considering entering into an IVA, you’re likely wondering if you will be able to take out new credit if you need it. During an IVA, you can still access credit, but there are some restrictions you must consider. For instance, you cannot borrow more than £500 without speaking to your Insolvency Practitioner.
Your IVA will require that you do not enter into further credit agreements exceeding £500 without express written permission of your Insolvency practitioner, who in turn will have to obtain express permission from your creditors. But even for an amount less than £500, it’s advisable to talk to your Insolvency practitioner before borrowing to help you determine if it’s a suitable choice for your current circumstances.
Forms of new credit that may be prohibited include; credit cards, personal loans, payday loans, bank overdrafts, etc. If your Insolvency practitioner declines to approve your request application for credit, it can be very hard to obtain a loan. Other types of household debts such as gas and electric arrears do not count as credit prohibited in the IVA.
Your IVA enables you to continue servicing these secured debts but if you need to change your vehicle, you will need to consult your Insolvency practitioner first.
If you enter into a loan agreement for more than £500 without receiving the written consent of your Insolvency practitioner, you will be breaching the terms and conditions of your IVA, which could lead to its failure. If your
IVA fails, you will still owe your creditors the outstanding amount with their interests and charges. You may have to come up with a new payment plan. Additionally, your insolvency practitioner or your creditors can ask the court to declare you bankrupt.
Your IVA Affects Your Credit Rating
It is highly unlikely that banks, credit card providers, and hire purchase providers will lend to you because of a low credit score. Some of your loans may already be in default and recorded in credit files maintained by credit reference agencies such as Equifax and Experian.
Although the IVA shows a positive step toward completing your debts, it is also recorded on your credit file and will stay there for a statutory period of 6 years. This means that any time a lender runs a credit check on you, records of your IVA and any other previous loan defaults will show up, for at least 6 years. Furthermore, your IVA is recorded in the Individual Insolvency Register for the whole duration of your arrangement and will be withdrawn 3 months after the completion of the IVA.
Popular loans with no credit checks people resort to are payday loans, doorstep loans or borrowing from family and friends. You should avoid these types of loans as they usually end up in the struggling to repay the new loan as well as maintaining your IVA. Not to mention breaching your IVA will cause it to fail. If a friend or family member offers you a loan, it is important to make it clear that you can only repay back after the completion of your IVA.
What About Financial Emergencies?
If you are facing a financial emergency, or if you need to resort to loans to cover your day-to-day costs, it is important to speak to your Insolvency Practitioner. Your insolvency practitioner may propose to your creditors to lower your monthly payments if the proposed budget isn’t working or allow you to skip a month or two.
While the Individual Voluntary Arrangement may have some negative implication when it comes to getting credit, it significantly increases your chances of getting credit in the long term.
Flexible debt solutions works as an intermediary. If you are looking to apply for an IVA through our site, we will assess your credentials and pass you onto a debt specialist suited to your needs – who will pay us a fee on introduction.