Many people recovering from debt or considering entering into an Individual Voluntary Arrangement (IVA) are, understandably, concerned about how they will recover financially. It can be a worrying time, but in the right circumstances, using an IVA to clear debt can be the beginning of a journey to financial freedom.
An IVA is a legal contract between you and your creditors, and it allows you to pay back only what you can afford over a fixed term — usually around five years. Once the term is completed, the rest of your debt is written off, and it’s time to start your new financially free life!
What Happens after Using an IVA to Clear Debt?
The default registered at the start of your IVA will stay on your credit file for six years, so if your IVA is completed after five years, it will remain on your credit file for just one more year. This means that, as soon as you have made your final payment, it’s time to start thinking about ways to build your credit back up.
As well as helping you to become financially free, an IVA teaches you how to budget. IVA payments are calculated so that your monthly expenses are all taken into account and the amount left over (your disposable income) is paid into the IVA, so budgeting your spending is an absolute must. However, just because you now have that lump sum of money each month after completing your IVA, doesn’t mean you should go out and spend it all at once! It is as important now as ever to continue to live within your budget.
You can find some helpful budgeting advice and guidance here.
Keeping an Eye on Your Credit Score
Although a record of your IVA will remain on your credit file for six years, it is your responsibility to keep an eye on your credit score, ensure your information is correct and keep your current details up to date. Only your creditors can update your credit file, not your IVA provider. Your credit score can be checked for free (usually updated monthly) on websites such as Experian, Credit Karma and Equifax. For more in-depth information and credit reports, some services may require a small monthly fee.
Rebuilding Your Credit Score
So, you’ve completed your IVA and now have a blank slate to work with. Don’t be disheartened by a poor credit score, it’s time to start restoring your credit, and it’s much more achievable than you may think.
Here are a few things you can do to help:
- Open a Bank Account: If you haven’t already done so, open a bank account to keep evidence of good money management.
- Register on the Electoral Roll: Proving your address and how long you’ve lived there shows stability and enables lenders to verify your identity.
- Be the Named Person on Utility Bills: Showing that you can keep up with regular payments on things like gas and electricity or a mobile phone is a great way to show lenders that you can manage your money.
- Research “Credit Builder” Credit Cards: There are credit cards available to people with poor credit that help them to build back their credit scores. However, these cards will likely have high-interest rates, so just make small purchases and pay them back in full at the end of every month. This will, again, prove excellent money-management skills and boost your credit score.
A Great Time to Start Saving
After completing an IVA, you will have had five or six years of living on a budget, so rather than getting too used to having the extra money each month, why not start putting some of it to one side in a savings account? Setting up a standing order for even the smallest amount of money per week/month will make a world of difference, and you’d be surprised how quickly it mounts up.
People save for different reasons. Some save for emergencies such as home and car maintenance, some save for holidays and large purchases. Either way, having money set aside means that, when it’s needed, you’re less likely to resort to borrowing money and beginning the debt spiral all over again.
An IVA doesn’t mean the end of your financial road — it can be the beginning. Do your research on IVA providers, and look at some real case studies/testimonials from real people that have completed their IVAs and are well on their way to financial freedom.
Laura Prescott, Chief Executive Officer at Debt Movement, is a qualified Insolvency Practitioner licensed to act in the UK with over 15 years insolvency experience.
During her insolvency career, Laura has held a wide range of insolvency appointments, helping individuals in financial difficulty in addition to stakeholders of distressed businesses, with practical experience in managing large portfolios of personal insolvency appointments across the whole of the UK.
Over the last 15 years, Laura has gained extensive knowledge of operational processes in addition to developing strong relationships with regulators, creditors and their representatives.
Laura holds a BA Hons degree in Law, a Masters in Employment Law and is a member of the Insolvency Practitioners Association.