An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a set period. While an IVA provides a structured way to manage overwhelming debt, it also comes with strict rules regarding your finances. One of the most common questions people have while in this arrangement is whether they can still take out a loan or access credit.
Generally, obtaining credit while in an IVA is difficult and often restricted by the terms of your agreement. Most IVAs include a clause that prevents you from borrowing more than a small amount—typically £500—without written permission from your Insolvency Practitioner (IP). Understanding these rules is essential to ensure you do not breach your agreement and risk the failure of your debt management plan.
The Legal Restrictions of an IVA
When you enter an IVA, you are making a legal commitment to use your disposable income to pay off your debts. Because of this, your ability to take on new debt is strictly monitored. Most IVA contracts state that you cannot obtain credit of more than £500 without the express consent of your Insolvency Practitioner.
This restriction applies to all forms of credit, including personal loans, credit cards, store cards, and even some types of monthly contracts. If you borrow money without permission, you are in breach of your IVA. A breach can lead to the termination of the arrangement, which might result in your creditors taking legal action against you or even filing for your bankruptcy.
Why Lenders Are Cautious
Even if you have permission from your IP, finding a lender willing to offer a loan during an IVA is challenging. An IVA is recorded on your credit report and remains there for six years from the date it started. This significantly lowers your credit score, signaling to lenders that you have had trouble managing debt in the past.
Traditional banks and high-street lenders usually view individuals in an IVA as high-risk borrowers. If they do offer credit, it often comes with very high interest rates and unfavorable terms. It is important to weigh the cost of these loans against your current budget to ensure you don’t fall back into a cycle of unmanageable debt.
How to Seek Permission for a Loan
There are certain circumstances where borrowing money during an IVA is necessary. For example, you might need a loan to replace a broken boiler, repair a car needed for work, or cover an unexpected medical expense. If you find yourself in this situation, you must follow a specific process.
- Contact your Insolvency Practitioner: Before applying for any credit, speak with your IP. Explain why you need the loan and how much you intend to borrow.
- Provide Evidence: You may need to show why the expense is essential and provide quotes or invoices for the cost.
- Demonstrate Affordability: Your IP will need to see that you can afford the new loan repayments without affecting your agreed IVA payments.
- Receive Written Consent: If the IP agrees, they will provide a letter of consent. You will need this to show potential lenders that you are authorized to borrow.
Keep in mind that your IP’s primary responsibility is to ensure your creditors are paid. They will only approve a loan if it is absolutely necessary and does not jeopardize the success of your arrangement.
Common Types of Credit During an IVA
While traditional personal loans are often out of reach, some specific types of credit might be accessible if your IP approves them. Each comes with its own set of risks and benefits that you should consider carefully.
Car Finance
If your car breaks down and is beyond repair, you may need finance to purchase a replacement, especially if you need a vehicle for work. Some specialized lenders offer car finance to people in IVAs. However, these loans often have high interest rates. Your IP will usually only approve this if the monthly payments are modest and essential for maintaining your income.
Guarantor Loans
A guarantor loan involves a second person, such as a friend or family member, who agrees to pay the debt if you cannot. While this makes lenders more likely to approve the loan, it puts a significant financial burden on your guarantor. You still need permission from your IP to enter into a guarantor loan agreement.
Credit Unions
Credit unions are community-based organizations that offer small loans at more affordable rates than payday lenders. They are often more willing to look at your individual circumstances rather than just your credit score. Many people find that credit unions are a safer alternative for emergency borrowing during an IVA.
Alternatives to Taking Out a Loan
Because borrowing money during an IVA is risky and expensive, it is often better to look for alternatives. There are several ways to manage financial emergencies without taking on more debt.
- Request a Payment Break: Most IVAs allow for a short payment holiday or a reduction in payments if you face an emergency. This allows you to use your usual IVA payment money to cover the urgent cost instead.
- Use Your Emergency Fund: If your IVA budget allows for a small amount of savings, check if you have enough to cover the expense.
- Local Authority Grants: Some local councils offer welfare assistance schemes or emergency grants for people in financial hardship. These do not have to be paid back.
- Hardship Funds: Some utility companies and charities have hardship funds to help people pay for essential repairs or energy bills.
Protecting Your Financial Future
The ultimate goal of an IVA is to help you become debt-free. Taking on new loans during the process can prolong your financial struggles or even cause the arrangement to fail. If you are struggling to make ends meet, the best course of action is always transparency.
Talk to your Insolvency Practitioner as soon as financial difficulties arise. They can often adjust your budget or renegotiate terms with your creditors to make your payments more manageable. By staying within the rules of your IVA, you protect the progress you have already made toward a fresh financial start.
Once your IVA is successfully completed, you will receive a certificate of completion. At that point, the restrictions on borrowing are lifted, and you can begin the process of rebuilding your credit score naturally. This involves managing small amounts of credit responsibly and ensuring all bills are paid on time.
Conclusion
Navigating financial needs while in an IVA requires careful planning and open communication with your Insolvency Practitioner. While it is possible to get a loan in specific circumstances, the restrictions are there to protect you from falling back into debt. Always prioritize alternatives like payment breaks or local grants before considering high-interest credit options. For more guidance on managing your finances and navigating complex credit situations, explore our other articles on debt relief and personal budgeting.