When an insolvent debtor enters into an Individual Voluntary Arrangement (IVA) with creditors, all unsecured accounts automatically go into default, given that the debtor immediately ceases to comply with the terms and conditions of the relevant credit agreements.
Some of the debtor’s accounts may already have been in default prior to the commencement of the IVA. All defaults are recorded on the debtor’s credit files which are maintained by credit reference agencies such as Experian and Equifax. Access to and publication of such personal financial data relating to insolvent individuals is not prohibited by the Data Protection Act. The business of the credit reference agencies is to retrieve such data, record it on the debtor’s credit file and sell it to interested parties provided that they have a consumer credit license. This is how the credit reference agencies make their money. Thus banks, mortgage providers, HP providers, credit card providers and even trading creditors may be able to access the credit files of the private citizen. For a small fee any private individual can access their own credit file. Indeed, in certain circumstances, a private citizen can obtain the credit file of another person if for example both individuals are living in the same property, whether or not they are co-habiting.
The record of such defaults remains on the debtor’s credit file for six years from the time that the default occurred. When a debtor enters into an IVA, default data relating to that debtors accounts and debts will not be removed from the credit files for six years, even if the debtor successfully complete his or her IVA and obtains a Certificate of Completion (of the IVA) from their IVA supervisor.
A standard condition of any IVA is that the debtor does not acquire any credit and does not enter into any credit agreement without the express permission of their supervisor. The supervisor’s discretion in granting such permission is also restricted and may require the express permission of the debtor’s creditors. There are usually some practical exceptions to this requirement. Such exceptions are anticipated and stated in the debtor’s IVA proposal. For example, the debtor will usually be allowed to incur credit in regard to certain utilities such as water charges and electricity and gas services but a monetary ceiling is normally imposed on such items of expenditure e.g. no more than £500 credit may be incurred in respect of such an item. The debtor’s credit files will carry the records of such credit activities. It is important that the debtor maintain the payments as they fall due in respect of all forms of credit permitted in accordance with the terms and conditions of the IVA. On completion of the IVA, the debtor can expect his or her good track record relating to the servicing of such credit to be viewed positively by creditors.
In regard to the debtor’s secured debts, the IVA requires that the debtor continue to service these. However, if for example, the debtor needed to change their car during the term of the IVA and enter into a new HP agreement, then the express permission of the supervisor and creditors would have to be obtained. A prescient debtor might anticipate that this need could arise and could state it up front in the IVA proposal but nevertheless it will still be necessary to clear it with the IVA supervisor before proceeding with the matter. If the debtor wanted to re-mortgage their property to release equity or to extend the term of their mortgage (thereby reducing monthly mortgage payments) or to switch their mortgage payments from a repayment basis to an interest only basis, again they would have to obtain the express permission of the IVA supervisor and of creditors.
In considering any request for credit facilities, whether during the life of the IVA or following its successful completion, creditors will naturally check on the debtor’s credit history as recorded in their credit files. The debtor may be refused credit by some lenders if the credit files still carried records of defaults. Even if credit is granted, the debtor may have to pay premium interest rates. For example, if the debtor were to seek to take out a mortgage for example, lenders would be likely to seek a higher deposit than they would if the debtor had a clean credit history and it would not be unusual to be quoted interest rates as much as 6% to 8% greater than high street rates.
On the other hand, creditors will take into account that the debtor dealt with his or her former financial difficulties by entering into an IVA, by complying with the terms and conditions of the IVA and by successfully completing it. They will also consider how the debtor managed any credit they were permitted to access while in the IVA (e.g. credit used to pay for utilities). The conduct of the debtor in the IVA may well have a crucial bearing on whether they can obtain post IVA credit and what interest rates they may be charged. It is certainly easier to access credit after completing an IVA than it is after being discharged from bankruptcy.
Entering an IVA certainly affects credit ratings. However, six years from the dates that the defaults commenced, the credit reference agencies are supposed to automatically update the debtor’s credit files and remove all references to their defaults. A debtor who finds that this has not been done can request the credit reference agencies to do so. If they do not get a satisfactory response, they can invoke the complaints procedures of the relevant credit reference agency to ensure the matter is dealt with so that they can begin to repair their damaged credit ratings.