If your debts are so bad that you are going to have to choose one of the three types of insolvency, you know this will wreck your credit rating, but how long will this continue? This article answers this and other you may have about the effect of insolvency on your credit record such as Will you ever be able to get credit again? What about a mortgage? Is bankruptcy worse than an IVA or a DRO for your credit score?
Insolvency and your credit record
All three forms of insolvency are shown on your credit records in a similar way. Initially the start date of the bankruptcy, DRO or IVA is shown in the Public Record section. Later another record showing your discharge from bankruptcy, completion of the DRO or completion of the IVA is added. If you are given a Bankruptcy Restriction Order (which are rare) this is also shown. Here is an example from Experian that shows bankruptcy and discharge from bankruptcy.
After six years it all disappears… or does it?
After six years from the start date, if your insolvency has ended, both the start and the completion records will be deleted from your credit file and a future lender will not be able to tell you have been insolvent.
Your debts should have been marked as defaulted on or before the start on your insolvency – these will disappear six years after the default date, so by the time your insolvency marker goes, the debts will also drop off.
So there will be no trace of your insolvency left after six years, with four exceptions.
- an IVA will not disappear until six years has passed AND a completion certificate has been issued. This can be more than six years from the start date, for example if another year of payments was added because you couldn’t release equity in the fifth year, or your IVA firm is just taking a long while to sort out PPI;
- the very rare occurrence of a long bankruptcy restriction order which in still in place after the six year point;
- the problem where a debt has the wrong default date marked – see below for how to get this corrected;
- lenders can keep their own records for as long as they want. So if a debt to NatWest was included in your IVA or bankruptcy and you later apply to them for a loan you may still be turned down even if your credit record looks “clean”.
One situation you may think is an exception isn’t. If you settle your IVA early, even if you repay all your creditors in full, the IVA marker will remain on your credit records for the full six years and during this time you will be unable to get a mortgage.
Starting to repair your credit rating
The main thing that will repair your credit record is time – waiting until the six year point is passed. But before then you can start the process of repair by making sure all the default dates are correct. See the following articles on credit repair, the process is exactly the same for bankruptcy, IVAs and DROs but there is a separate article for each as the details about the dates and the exact wording of the letters is different:
- clean up your credit record after bankruptcy
- clean your credit record after a DRO
- clean up your credit record after an IVA.
Those articles also covers applying for a “bad credit” credit card to start getting some good repayment markers on your credit file. If you don’t take out any credit until after the six years ends, you are likely to have a very “thin” credit file, as all the old debts will have gone leaving nothing, which doesn’t look good to a future lender.
Because bankruptcy and DROs end after a year, in practice this means you can start the credit repair process sooner than with an IVA. This isn’t a huge factor though – until the six years is up, your credit score is never going to get to be good.
What about a future mortgage?
A future mortgage lender won’t be able to see your insolvency after it has vanished from your credit file but you may be asked about this on a mortgage application. Some examples:
- “Ever been bankrupt or subject to an IVA?“
- “We will be unable to lend to you if you have been declared bankrupt or entered an IVA.“
Other banks want to know the information but may still consider lending:
- “Lending to a customer with a history of bankruptcy OR who has been the subject of a Debt Relief Order (DRO) or an Individual Voluntary Arrangement (IVA) can be considered provided any bankruptcy, DRO or IVA was registered more than 6 years ago from the date of submission of any mortgage application and no longer shows on the credit reference bureau information.“
There is a common myth that if you go bankrupt you can never get a mortgage… and it is also frequently assumed that an IVA is “better” than bankruptcy for getting a mortgage in the future. But as the above examples show, you are likely to have some problems getting a mortgage after any form of insolvency.
In this situation, you should always go through a mortgage broker, not direct to a mortgage lender even if you are applying several years later and your credit file is back to looking good.
The mortgage deposit problem
Your credit rating isn’t the only thing that matters when you apply for a mortgage. Suppose Mrs A has £25,000 of unsecured debt that she can’t manage and her aims are to clear the debts and then be able to buy a house. She could choose a DMP, an IVA or bankruptcy (she owes too much for a DRO). If she can pay £350 a month then:
- she will make payments to a DMP for 6 years (assuming interest is frozen);
- she will make payments to an IVA for 5 years;
- she will make payments in bankruptcy for 3 years.
If she starts saving the £350 a month when these payments end, after 10 years she will have the following house deposit:
- after a DMP: £16,800
- after an IVA: £21,000
- after bankruptcy: £29,400
So if you were a lender, who would you prefer to lend to? Someone who hasn’t been insolvent at all with a low deposit? You might “prefer” an IVA to bankruptcy, but does the difference in the deposit even this up? A “bad credit” broker is likely to know more about which lenders would be interested given your situation.,
So is one sort of insolvency better or worse for credit ratings?
Not really. The shorter duration of bankruptcy and DROs means that you can start the “credit file repair” process a bit sooner than with an IVA, but it will still take six years until your score can really improve. For mortgages you are likely to have to disclose any type of insolvency.
I suggest that worries about credit ratings and dreams about buying a house in future should come low down on your list of factors when trying to choose how to tackle your debts. Instead look at the practicalities – how much will you have to pay for how long, what flexibility is there, do you have equity that you need to protect etc. Debt Camel’s Hard Debt Choices page gives direct comparisons of the different debt options.