What is an IVA?
An individual voluntary arrangement (IVA) is a form of insolvency. Personal insolvency means you are unable to pay your debts as and when they fall due. Simply put, an IVA is an agreement between you and the organisations you owe money to that sets out when and how you'll repay them.
This might be in the form of a lump sum payment by a specific time, or you might agree to have payments come off your salary. With an IVA, you agree to make these payments and the creditors (who you owe money to) may agree to eliminate some of the debt so you won't need to pay the full amount owed. An individual voluntary arrangement is a popular alternative to bankruptcy, however, not everyone can qualify for an IVA. In addition, your creditors must agree to it, and not all debts are included (student loans, fines and child support for example are excluded).
Individual voluntary arrangements are the most common form of insolvency in the UK. During Q1 2021, there were 29,140 (seasonally adjusted) individual insolvencies, of which 22,354 (76.7%) were individual voluntary arrangements.
An IVA will negatively affect your credit score, but it can also be an opportunity to get your finances back on track. Once you have successfully completed your IVA—which for most people takes about 5 years—you can begin rebuilding your life and improve your credit score. Remember, the record of your IVA will be on your credit file for six years even if you finish it before that time. It won’t be removed from your file any earlier, but once it is marked as ‘complete’ your chances of credit approval might increase. If your individual voluntary arrangement is as the result of extenuating circumstances, you can add a note on your report explaining to lenders why you got into debt and had to set up an IVA, for example, due to redundancy or long-term illness.
Insolvency vs. Bankruptcy
While insolvency is a state of financial distress, it does not necessarily mean you are bankrupt as you may have assets such as a house or car, the value of which exceeds the amount of your debt. Insolvency assumes you are in a position to pay back at least some of the money owed, but you cannot manage all of your current debt repayments when they are due.
Bankruptcy is another form of personal insolvency but it generally means there’s no chance of creditors getting back any of the money owed to them. If you've got a lot of debt, bankruptcy may be a way out, but you'll only be accepted for bankruptcy if the value of what you own is less than the debt that you owe.
Bankruptcy is a legal process whereby the Court makes a Bankruptcy Order against you. You can choose to file for bankruptcy yourself, or a creditor can file to have you made bankrupt if you own them £5,000 or more.
Although bankruptcy can provide debt relief, it is usually a last resort, especially if you own a home or business.
- If you own your home and choose an IVA, you probably won’t be forced to sell your home (although each case is different), however if you own your home and have equity in it and go bankrupt, it’s very likely that you will be forced to sell it. If there isn’t any equity in it, you may be able to keep it.
- If you have some spare income each month or a lump sum of money to make repayments to creditors, an IVA may put you in a position to keep some of your valuable assets such as your vehicle (if it holds significant value), or jewellery. When you declare bankruptcy you risk losing valuable assets as creditors seek to recoup as much of their money from you as possible.
- With an IVA, you can continue to use your bank account. In fact, you do not even have to let your bank know about your IVA. If you go bankrupt your bank account is likely to be closed.
- Under an IVA, you may have to pay more to creditors than you would do if you became bankrupt, and for a longer period, but you do get some flexibility in what you have to repay. With bankruptcy, everything you own stops being your property and is used to pay off your debts.
Rebuilding your credit score after IVA
After completing your individual voluntary arrangement you will receive an IVA Completion Certificate from your licensed insolvency practitioner. Your IVA will be marked as ‘completed’ on your credit file. To be certain that the Credit Reference Agencies (CRA) have received the information regarding the completion of your individual voluntary arrangement, make copies of your certificate of completion and send to Experian, Equifax and Transunion. The CRAs will update your file to show your individual voluntary arrangement has been satisfied and completed successfully. It is best practice to request a copy of your credit file and check that the information held is accurate and up-to-date and the IVA is shown as completed.
Your individual voluntary arrangement stays on your credit file for six years from the day it started so lenders will be able to see it and will likely be wary of lending to you. It’s up to you to work at building your credit score so show lenders that you are working hard to turn your financial situation around.
While building your credit score may be challenging in the first few months of the IVA being marked ‘completed’, it’s not impossible. Remember, lenders typically pay more attention to your most recent credit history, so as your IVA ages, your score should gradually improve. Once the IVA is removed from your report after six years you’ll find building your credit score even easier.
Start building positive credit history
In order to prove that you can responsibly borrow and repay credit, you have to have access to credit, which will be difficult after an IVA. Building a solid credit history of making on-time repayments is one of the fastest ways to build your credit score.
A secured card is a safe alternative to a regular credit card and you can get one even with a poor credit score. By making a deposit equal to the amount of credit that you require, it’s risk-free for lenders because if you default on payments they will use your deposit to ensure they are not out of pocket. It’s also low risk for you. You cannot get into debt due to the deposit that has been made, however, if you do not make your payments on-time, you risk doing further damage to your credit score. A secured card still comes with responsibility to manage it.
Do not use too much of your available credit
Once you’ve got a secured card, try to keep your usage below 30%. If your secured card has a credit limit of £500, that means never carrying a balance of more than £150. When you use a large percentage of the credit you’ve been extended, lenders may believe that you are already heavily relying on credit and thus may be reluctant to let you borrow more.
Don’t fall into old habits
Completing your individual voluntary arrangement represents an opportunity to start over. It’s critical not to slip back into the old habits that got you into serious debt in the first place. Keep your spending on track by budgeting and planning for the future.
Ultimately, the key to building your credit score with a completed IVA on your credit file is to do so slowly, consistently and as low risk as possible. At all costs avoid going back to living on credit, paying only minimum payments.
