Will debt management or an IVA affect my credit rating?

Implementing a debt management plan or an individual voluntary arrangement will have a negative impact on your credit rating. However, doing nothing and simply letting a debt problem get worse will have the same effect.

If you have debts which you are unable to repay, you may well consider undertaking a debt management plan (DMP) or individual voluntary arrangement (IVA). These two solutions are very different.

A debt management plan is a gentleman’s agreement with your creditors to reduce the payments you make each month to an affordable amount. An IVA is a formal agreement with creditors to pay back as much as you can over a fixed period (normally 5 years). After this time any unpaid debt is written off.

Although both solutions are different, their effect on your credit rating is the same. If you put in place a DMP or IVA, you will stop making the normal minimum monthly payments required by your creditors. This will normally result in the creditors issuing a default notice against you.

Any default notices you receive will be recorded on your credit file. The result will be that your credit rating is seriously damaged. If you have a default notice on your file, this acts as a warning to other lenders not to lend more money and so new borrowing will be difficult. This situation will occur whether you undertake an IVA or DMP.

Once default notices have been issued against you, your credit rating will not really improve until your debts have been repaid or settled. With an individual voluntary arrangement, this will happen after 5 years when the agreement ends and any outstanding debt is written off. If you are using a debt management plan, this will not happen until all of your debt is paid in full which could take much longer.

Because it can often take over 10 years to repay your debts in full using a debt management plan, it is arguable that using this solution will mean that your credit rating is negatively affected for longer. However using either of these solutions will certainly mean that you will find taking new credit difficult.

Despite the negative effects that undertaking a Debt Management Plan or Individual Voluntary Arrangement have on your credit rating, do not be fooled into thinking that if you avoid such a solution, you will be able to better protect your credit score.

If you do nothing to solve a debt problem, there will come a point where you are simply unable to continue making the monthly repayments. In terms of your credit rating, the result of this will be exactly the same result as if you carry out a DMP or IVA. Your creditors will issue default notices against you and your credit rating will be seriously damaged.

For this reason, trying to protect your credit rating is not a good argument to use for not dealing with your debt head on and implementing a debt management solution. Doing nothing and simply defaulting will damage your credit file in exactly the same way. For this reason it is always best to take action and get out of debt. Once your debts are gone, over time your credit rating will improve once again.