Will being insolvent impact my credit rating?

Summary: This article outlines how being insolvent could affect an individual’s credit rating, for how long and the potential impact this could have.

Insolvency is when an individual, or business, can no longer afford to repay debts after all essential expenditure, and the value of their debts outweighs the value of their assets. I the case of personal insolvency, there is usually one of 3 outcomes: entering an individual Voluntary Arrangement (IVA), a Debt Relief Order (DRO), or to be declared bankrupt. In any case, it will be recorded on an individual’s credit rating.

How could a record of insolvency on my credit record affect me?

It is likely, though not definite, that an individual will already have a poor credit rating prior to the insolvency, irrespective of the outcome. This is because whenever there is a default on debt, it will be recorded on the credit record. Therefore, an IVA, DRO or Bankruptcy may not have a huge additional impact in the short term. However, while the record is held, it is likely to be difficult to obtain further credit and/or mortgage. Even if further credit is offered, it could have a much higher interest rate associated. A mortgage will almost certainly be refused, though if agreed- it will not be at preferential rates.

How long will details be held on my credit record?

Usually, details will be held on the file for a period of 6 years; however this could be longer depending on the restrictions imposed. It is important to be aware that even after details have been removed from the record, there could still be an impact on gaining further credit, as some lenders may ask if an individual has ever been insolvent in the past.

Is an IVA viewed differently from bankruptcy when trying to get credit?

While the details are still on the credit record, there is unlikely to be any difference to a lender considering an application. However, those that have successfully completed an IVA may be considered more favourably than those that were declared bankrupt, as in an IVA the individual shows willing and that they are able to budget their spending in order to clear as much debt as possible.

Anyone who believes they may be insolvent, or are concerned that they may become insolvent should seek immediate advice from a licensed money advisor, or from one of the 'free' organisations such as the Citizens Advice Bureau (CAB), National Debtline or Stepchange.