Oscar Wilde claimed that he who pays his bills on time is soon forgotten. He also claimed that it was only by not paying one’s bills that one could hope to live in the memory of the commercial classes. These two statements are probably as valid today as they were in his time although thankfully we do not have a debtor’s prison as such today.
The massive increase in levels of personal indebtedness has led to a corresponding increase in the numbers of insolvent persons looking for ways to address their debts. Most people who encounter serious debt problems seek to enter into an Individual Voluntary Arrangements (IVA) or petition for their own Bankruptcy (BCY) or enter a Debt Management Plan (DMP). A crucial factor in either an IVA or BCY is that a portion of the debts are written off i.e. some of the debts are ‘forgiven’.
In an IVA, creditors accept repayment of a portion of the debts and in return agree to forgive the remainder. Typically most IVAs offer a yield to creditors of between 20% and 50% of the debt with the amount being forgiven usually falling between 80% and 50%. In BCY, even less debt is usually repaid and frequently creditors receive nothing at all from the estate of the bankrupt after trustee and other fees are paid. In many cases of BCY, debts are almost totally forgiven although that does not mean that the debtor gets off scot-free. The substantial costs of bankruptcy often totally consume any payments the bankrupt has to make to the trustee such as via an income payments order or through the sale of assets such as the debtor’s home. In a DMP however, there is usually no debt forgiveness although creditors may choose to suspend or freeze interest and penalties for the duration of the plan or for some limited period.
While creditors may forgive debts to some extent, nowadays they do not forget. For example, when you enter into an IVA all unsecured accounts automatically go into default, given that you have ceased to comply with the terms and conditions of the relevant credit agreements. Some of your accounts may already have been in default prior to that time. All defaults are recorded on your credit files which are maintained by credit reference agencies such as Experian and Equifax. Access to and publication of such personal financial data is not prohibited by the Data Protection Act. The business of the credit reference agencies is to retrieve such data, record it on your credit file and sell it to interested parties, provided that they have a consumer credit license. The record of such defaults remains on your credit file for six years from the time that the default occurred. If you enter into an IVA, default data will not be removed from your credit file for six years, even if you successfully complete your IVA and obtain a Certification of Completion (of your IVA) from your supervisor.
This is the price you pay for default, long after your creditors have forgiven or part forgiven your debts. In considering any request for credit facilities, following the successful completion of your IVA, creditors will naturally check on your credit history via your credit file. You may be refused credit by some lenders if your credit file still carries records of your defaults. Even when you are granted credit, you may have to pay premium interest rates. If you were to seek to take out a mortgage for example, lenders would be likely to seek a higher deposit than if you had a clean credit history and you will be quoted interest rates much higher than high street rates. On the positive side, you will certainly find it easier to access credit after completing an IVA than you would if you had just been discharged from bankruptcy.