Insolvency and its effect on your credit score

Posted by Tom Blandford in Dealing with Debt on 17 November 2016 - Tom is a Credit Analyst at checkmyfile

Contrary to the belief of some, insolvency is not a ‘get out of jail free card’. When you are declared insolvent, the entry remains reported for 6 years on your credit file and will continue to pose a significant barrier to your chances of obtaining credit – even after the insolvency is discharged.

Insolvencies come in several forms, each with different criteria. The most well-known is the bankruptcy - often over-generalised as a blanket-term for all insolvency, a bankruptcy can be petitioned for by an individual or their creditors where £750 or more is owed. As part of this insolvency, assets may be sold in order to repay the debts and the resulting funds are then split proportionally between each creditor based on the amount of debt owed to each creditor. In Scotland, the bankruptcy’s closest relative is called a Sequestration. To apply for a sequestration, over £1,500 must be owed in unsecured debts and there must be no other realistic solution available to relieve the individual’s debt.

Both bankruptcies and sequestrations can be discharged after a year from the date of insolvency, at which point a copy of a discharge certificate issued by the court can then be sent to each creditor included in the bankruptcy order. Typically, this will mean that the relevant credit agreements will be marked as satisfied (or partially satisfied) along with the insolvency’s entry as discharged.

Another common form of insolvency is an Individual Voluntary Agreement (IVA). This is available to those who owe at least £12,500 in unsecured debt where 75% of the creditors included in the agreement have voted to accept a payment proposal. Its nearest Scottish equivalent is a protected trust deed, where applicants are required to pay at least £50 per month, as well making a minimum total repayment of 10% of their total debt.

The key difference between these insolvencies is the length of time until completion – IVAs are usually completed within 5 years, whereas protected trust deeds can be completed as soon as 3 years after the date of insolvency. In both cases, repayments are usually made for the same length of time as the time until completion, as both agreements are legally binding, defaulting on an IVA or protected trust deed can lead to the creditors petitioning for bankruptcy.

Often dubbed ‘bankruptcy light’, Debt Relief Orders (DROs) can also appear on credit reports however the requirements are very specific as to not conflict with other forms of insolvency. The total amount of debt must be lower than £15,000, the individual must work for minimum wage, cannot own their own home, the individual cannot have more than £50 income spare each month and a DRO must not have been petitioned for in the last 6 years. The upside to a DRO is that it is easily affordable in comparison to a bankruptcy or IVA, which can often be too expensive for those already struggling for money. Similarly to IVAs and bankruptcies, DROs also have a Scottish equivalent called a low income low asset bankruptcy (LILA).

Despite the differences between each form of insolvency, they are all reported similarly to the credit reference agencies. Each insolvency is reported for 6 years from the date of insolvency and are marked as discharged once its completion requirements have been met.

A common misconception associated with insolvencies is that the accounts included in the order are removed once the insolvency’s expiry date has been reached however this is not quite true. Once an account has included in an insolvency, the relevant lenders also mark the accounts as defaulted, however, there can be some variation as to how soon lenders report the default status. Defaulted accounts are reported for 6 years from the date of default so there can therefore be a delay in the accounts dropping off a credit even when the insolvency they were included in is no longer visible on the file.

Until an insolvency expires and is removed from an individual’s credit file, its negative influence also lingers on their credit score. When an insolvency is discharged, it merely indicates that the repayments are no longer ongoing – lenders, landlords and employers would still usually be extremely cautious of accepting the application as the insolvency can still be considered evidence of a past unreliability keeping up with payments. Once the entry is removed however, it will not be visible to potential lenders nor will it be factored into credit score calculations.

Check Your Multi-Agency Credit Report

30 Day Free Trial

Dealing with debt collectors

Don’t think for a moment that you’ll never see a debt collector in your lifetime. Even if you have a sparklingly brilliant credit file, you could find yourselves facing a doorstep collector.

Published on 19 Feb 2018 by Barry Stamp

Full Article

Does Statute Barred Mean My Debt is Written Off?

If you look around on the internet for debt advice you might see one questionable tip popping up from time to time: ‘don’t pay off your debts, wait six years for it to become statute barred and you’ll be home scot-free.’ If this sounds too good to be true, that’s because it probably is, and if you think it’ll be without consequence you could be in for a nasty surprise.

Published on 10 Jan 2018 by Tom Magor

Full Article

How Your Credit Score is Affected When a Default Drops Off

If you’ve got one default, you might be counting down the days until it is no longer reported to the Credit Reference Agencies. But if you have more than one, will you see your Credit Score rise as each one drops off of your Credit Report?

Published on 4 Jan 2018 by Richard Catlin

Full Article

What could happen after a county court judgment is issued

Once a court judgment has been issued but the individual still refuses to pay the outstanding debt or come up with an agreement to clear it, the claimant has a number of legal remedies available to them through the court systems.

Published on 16 Jan 2017 by George Coburn

Full Article

Facing Financial Problems

No one should feel like money problems are unique to themselves, we all have to think about money at some point. Financial problems, job security, debt and redundancy are all issues that realistically should be considered. How we react to these factors can impact our lives and our wellbeing, but luckily there are many different facilities that aim to help those trying to cope with money worries.

Published on 12 Jan 2017 by Paul Anderson Riley

Full Article

Consolidating Debt

Do you have what seems a never-ending mountain of debt and you’re struggling to know what you’re paying and to who? If so, you may be considering debt consolidation, in particular a debt consolidation loan.

Published on 9 Jan 2017 by Ben Ryland

Full Article

Don't give yourself a Christmas hangover

If you are concerned about debt during the festive season you should get advice now, warns the National Debtline. 5m Brits worry about money in the run up to Christmas, with one in three adults putting their gifts on credit, and if you are one of them, more debt is the last thing you want for Christmas.

Published on 6 Dec 2016 by Kelly Luff

Full Article

Students understanding of debt is seriously lacking

Christmas is an expensive time of year. Though for many students, this is just as relevant for most other times of the year too.

Published on 29 Nov 2016 by Ben Ryland

Full Article

Number of people going insolvent in England and Wales increases by almost a fifth

Personal insolvencies saw a 20% increase in the third quarter of this year compared to the same three months in 2015, based on data released from the Insolvency Service.

Published on 3 Nov 2016 by Ben Tumilty

Full Article

Credit Card debt sees highest growth since the Recession

Household credit card debt increased by more than £500m in October, pushing the amount owed on credit cards to £66bn – roughly £2,400 per household in the country.

Published on 2 Nov 2016 by Ben Tumilty

Full Article
keyboard_arrow_left

keyboard_arrow_right

We have loads of great customer reviews