Does an IVA Affect My Credit Rating?

In the United States, individuals facing significant debt may consider structured repayment plans or formal insolvency proceedings, such as Chapter 13 bankruptcy or debt management plans. Understanding how such arrangements generally affect credit is important, as these U.S. options have a substantial impact on an individual’s credit standing.

How a Formal Debt Arrangement Appears on Your Credit File

When a formal debt arrangement, such as a Chapter 13 bankruptcy or a debt management plan, is initiated, specific entries will appear on an individual’s credit report. For a Chapter 13 bankruptcy, the filing itself is recorded in the public records section of the credit report. This entry signifies a court-supervised process for reorganizing debts. Additionally, accounts included in the bankruptcy filing will be updated to reflect this status, often marked as “included in bankruptcy” or “discharged in bankruptcy” once the process concludes. The payment history for these accounts, including any late payments prior to the filing, remains on the report.

In the case of a debt management plan (DMP), the plan itself is generally not reported as a separate entry on the credit file. However, creditors may add a notation to individual accounts indicating that payments are being made through a DMP, or that the account is in financial counseling. These notations, along with the closure of credit accounts often required as part of a DMP, can be visible to lenders.

Impact on Credit Score and Future Borrowing

A formal debt arrangement impacts an individual’s credit score. Filings like Chapter 13 bankruptcy signal to lenders that the individual has experienced financial difficulty, typically leading to a drop in their credit score. This score reduction can range from around 100 to 240 points, depending on the starting score and existing credit profile. For individuals already possessing a low score, the impact might be less pronounced, and in some cases, a slight improvement may even occur as debt is addressed.

This decline in credit score makes it harder to obtain new credit during the period of the arrangement and for some time afterward. Lenders use credit scores and reports to gauge risk, and a formal debt arrangement indicates a higher risk profile. Consequently, securing new credit, such as mortgages, personal loans, or even certain phone contracts, becomes challenging. Any credit that might be offered will likely come with less favorable terms, including higher interest rates. For instance, a small change in interest rates, such as 10%, can increase the cost of borrowing.

During a Chapter 13 bankruptcy, obtaining new credit generally requires court approval, as the focus is on adhering to the repayment plan. Similarly, individuals on a debt management plan are typically advised or required to close existing credit accounts and avoid taking on new debt.

Duration of Information on Credit Reports

Information related to formal debt arrangements remains on an individual’s credit report for varying durations. A Chapter 13 bankruptcy typically stays on a credit report for up to seven years from the date of filing. This duration includes the period during which the repayment plan is active, which can last three to five years. Therefore, the bankruptcy record may remain visible for two to four years after the successful completion of the plan.

For Debt Management Plans, the plan itself does not have a specific duration on the credit report, as it is not listed as a separate account. Instead, the underlying individual accounts included in the DMP may carry notations from creditors indicating an “arrangement to pay” or a similar flag. These notations, along with records of any defaulted accounts prior to the DMP, typically remain on the credit report for up to seven years from the date of the first missed payment that led to the default or settlement.

Steps to Establish Creditworthiness Post-Arrangement

After a formal debt arrangement has been successfully completed, rebuilding creditworthiness requires consistent effort. Regularly checking credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) for accuracy is a foundational step. Dispute any incorrect or outdated information, as errors can negatively impact credit scores.

Establishing a positive payment history is a primary method for improving credit scores. This involves making all payments on time, including those for utilities, rent, and any remaining loans. Small, manageable credit accounts can help, such as a secured credit card, which requires a cash deposit as collateral, usually ranging from $200 to $5,000. Payments made on these cards are reported to credit bureaus, building a history of responsible use.

Another useful tool is a credit builder loan, where the loan amount is held by the lender while the borrower makes regular payments, which are then reported to credit bureaus. Loan amounts typically range from $500 to $2,000, with terms from 12 to 24 months. Maintaining low credit utilization, meaning not using a high percentage of available credit, also contributes positively to a credit score. Consistently demonstrating responsible financial behavior will help to restore and improve credit standing.