Article by Tom Blandford - 30th January 2019

Insolvency And Its Effect On Your Credit Score

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 six 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 Bankruptcy, which is often used as a blanket-term to describe all types of insolvency, but Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) are also common varieties. All forms of insolvency will have a dramatic impact on your ability to take out credit, and in all likelihood you probably see your Credit Score decline as well for as long as they appear on your Credit Report.

How long will insolvency affect my Credit Score?

Each form of insolvency will last for different periods of time and as such are likely to differ in how long they will affect your ability to take out credit as well. 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.

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.

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.

When applying for credit after insolvency however, the amount of time after an insolvency has been completed will make a big difference to lenders.

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, lenders mark the accounts as defaulted, however there can be some variation in 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.

For as long as the Defaulted account remains on your Credit Report it will have a negative effect on your Credit Score, but not as much as the insolvency itself. 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 an entry is removed, it will not be visible to potential lenders nor will it be factored into Credit Score calculations.

Can I take out credit with Bankruptcy or an IVA?

While you have an active insolvency you can still take out credit, but may need to get permission from your insolvency practitioner if you want to borrow more than £500. Depending on what you’re looking to borrow for, you might find that the number of places willing to loan money is small at best.

While the insolvency is active, most lenders are likely to take this to mean that you are still undergoing a period of financial difficulty and decline your application on that basis.

Originally posted 17/11/2016, updated 30/01/2019

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