IVAs and bank accounts

If you’re applying for an individual voluntary arrangement (IVA), sometimes you might be okay to carry using your existing bank account but sometimes it might be a good idea to open a new one.

Find out when you might be better off switching banks, what might happen if you don’t and the best type of account to opt for during and after your IVA.

Do I need to open a new bank account if I’m applying for an IVA?

If you’re applying for an IVA and you owe money to your bank or building society, e.g. if you have a loan, credit card or overdraft with them, we’d recommend you open a new account with a bank you don’t owe money to.

With an IVA, you’ll be making reduced payments to your creditors. But if you have a loan or overdraft with the bank or building society that provides your current account, that creditor could continue to take the full payment from your account. This is called ‘the right to offset’.

What is offsetting?

Offsetting allows a bank (or another bank that’s part of the same group) to transfer cash from your current or savings accounts to pay off other debts you owe them e.g. loans, credit cards or overdrafts. They don’t need your permission to do this.

It may be more difficult for banks to enforce their right to offset if:

your accounts or debts are joint
you’re already behind with payments for the debt they want to offset

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Problems offsetting can cause

If you have an IVA and your bank enforces its right to offset, this can cause a number of problems:

Your IVA might fail as your bank will be getting preferential treatment over your other creditors.
You might not be left with enough money to cover your bills, leading to extra charges and further debt. If you can’t pay priority bills, such as rent/mortgage or gas and electricity, you could face further problems e.g. eviction, repossession, having your energy supply disconnected.

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How to stop a bank offsetting

The best way to prevent offsetting is by switching to another bank that’s not part of the same group.

Or, if you have an overdraft, speak to the bank to see if they can separate the overdraft and set you up with a new basic account.

If you want to switch, we’ll be able to tell you which banks are associated with each other and suggest one with no links to your existing account provider.

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What type of account should I open?

A basic bank account is often the best type to opt for, mainly because it doesn’t come with an overdraft. Also, you won’t be charged fees by the bank if a direct debit or standing order doesn’t go through (although the recipient may add charges).

Most banks will let you open a basic account even if your credit history is poor. And because a basic bank account doesn’t come with an overdraft, it may help you avoid getting into further debt.

You can apply for a basic bank account even if you have arrears, default notices or a CCJ. And having an IVA won’t stop you getting a basic bank account either.

When you apply for a basic account, the bank should only conduct a soft search on your credit history. Only you will be able to see this on your credit report.

Who offers basic bank accounts?

Lots of banks and building societies offer basic bank accounts – and some banks are obliged to provide them.

Not all basic accounts are free, so it’s important to check the terms and conditions.

Which? has an up-to-date list, ranked in order of customer satisfaction. It also has information on how to apply.

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What do I need to open a basic bank account?

You’ll be asked to prove your identity and address, so you’ll need:

photo ID e.g. a passport or driving licence - most banks will accept copies; or
if you don’t have these, the bank might accept an alternative e.g. an original copy of a letter from HMRC or the Department for Work & Pensions
proof of your current address e.g. a utility bill or card statement – usually these will need to be dated within the last three months

Can my bank close my basic account?

A bank could close your basic account if you:

regularly fail to meet the terms and conditions of the account – terms and conditions may include paying in a certain amount of money each month or making a minimum number of transactions a month
move abroad
have access to another basic bank account

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How easy is it to switch bank accounts?

Almost all banks and building societies offer a free seven-day current account switching service.

The switch guarantee means your previous and new banks will sort out transferring your balance and payments, and closing your old account. It’s still a good idea to let your employer or anyone else who pays money into your account know about the switch, just in case there are problems.

Find out more about the switching process.

Can I keep my existing account if I don’t owe my bank money?

If you’re applying for an IVA and you don’t have any debts with your existing bank, you should be fine to carry on as usual without switching accounts.

Just be aware, some banks reserve the right to close your account if you enter an insolvency solution. But, unless you apply for additional credit (which we would strongly advise against in most circumstances during an IVA) and your bank conducts a credit search, it’s highly unlikely they would find out.

What’s the best account to get after an IVA?

When your IVA comes to an end, you may be keen to switch from a basic bank account to a standard current account with an overdraft and other benefits.

But it may be a good idea to wait a while, as your IVA may still be showing on your credit report. IVAs stay on your credit file for six years from the date they’re agreed and most IVAs last five years.

You’re unlikely to be accepted for a standard current account with an IVA on your credit report. So you should wait until it drops off and, even when it does, it may be a good idea to take steps to improve your credit rating before applying to switch accounts.

Once you’ve started to build up your credit score, you can start comparing bank accounts to see which one best meets your needs after your IVA.