| When I am advising people about debt management, | | | | same way as with a debt management plan. In |
| they will often ask me whether there are differences | | | | addition, the fact that the individual has entered into an |
| in how their credit rating will be affected if they | | | | IVA will also be recorded on their credit file which will |
| undertake a debt management plan, individual voluntary | | | | generally have a negative effect on a credit rating. |
| arrangement (IVA) or declare bankruptcy. All of these | | | | However, the IVA has the significant advantage of |
| different solutions are designed to help people who are | | | | being a finite solution. Generally after 5 years, the IVA |
| already in a position where they cannot afford to | | | | will be completed. At this stage a notice of satisfaction |
| repay the debt they owe. As such, it stands to reason | | | | will be recorded on the individual's credit file. The notice |
| that if any of these solutions are carried out, action will | | | | that the IVA existed will remain on the individual's credit |
| be taken to stop the individuals using them from taking | | | | file for 6 years. However, from the date that the |
| further credit. | | | | notice of satisfaction is issued, any potential lenders |
| The main action by creditors to prevent further credit | | | | are aware that all historic debts have been settled and |
| being taken will be the issuing of a default notice | | | | they can begin to consider the individual as a better |
| against the individual. A default notice is simply a formal | | | | lending risk. |
| acknowledgment that an individual has broken a | | | | If an individual chooses to declare bankruptcy, as with |
| repayment agreement with a creditor. This notice will | | | | the IVA and debt management plan, default notices will |
| be registered on the individuals credit file and will | | | | be issued. In addition, the bankruptcy will be recorded |
| therefore be visible to anyone considering lending to | | | | on the individual's credit file which, as with IVA, will have |
| the individual in the future. | | | | a negative effect on their credit rating. As with an IVA, |
| Generally a default notice will be issued by a creditor | | | | the notice of the bankruptcy will remain on the credit |
| whether or not an individual chooses to deal with their | | | | file for 6 years. However, in general an individual will be |
| debt using a debt management plan, individual voluntary | | | | discharged from their bankruptcy after 12 months. A |
| arrangement or bankruptcy. As such, the question | | | | notice of discharge will then be recorded on their credit |
| should not be if an individual's credit crating will be | | | | file and from this point potential lenders may start |
| effected undertaking these solutions but rather, how | | | | taking a more favourable lending view. |
| long the effects will last. This will differ between the | | | | Having analysed how an individual's credit rating will be |
| different solutions. | | | | affected by carrying out each of the different debt |
| The first solution to consider is a debt management | | | | management solutions, one could conclude that if the |
| plan or DMP. A DMP reduces the amount that an | | | | intent is to get back into a position where borrowing is |
| individual pays their creditors each month to an | | | | an option as soon as possible, then bankruptcy is the |
| affordable amount. However, a significant | | | | best solution to choose. Clearly however, this is not the |
| disadvantage of the DMP is that there is no | | | | only issue under consideration when deciding which |
| agreement for creditors to write off any of the debt | | | | debt management solution is the correct one to |
| owed. As such, it will generally take a long time to pay | | | | undertake. In addition, the way that potential lenders will |
| off in full. By definition, if an individual enters into a debt | | | | react to an individual who has got into difficulty with |
| management plan with their creditors, they will be | | | | credit in the past is difficult to predict. This has become |
| breaking the original credit repayment agreement. As | | | | even more problematic in the light of the current credit |
| such must creditors will issue default notices. These | | | | crunch and the general reluctance of banks to lend |
| notices will generally remain on the individuals credit file | | | | money to seemingly even the most credit worthy |
| until the debts are settled or paid off in full. As such, | | | | individuals. In light of this, if you have a debt problem, |
| using a debt management plan will mean an individual's | | | | my recommendation is that that your first priority |
| credit rating will remain adversely effected for many | | | | should be worry about resolving the problem in the |
| years (until the debts are repaid). | | | | best way. Being able to borrow again at a later date |
| In an individual voluntary arrangement (or IVA) default | | | | should actually be a secondary consideration. |
| notices will be issued against the individual in debt in the | | | | |