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What happens to my benefits if I go bankrupt
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What happens to my benefits if I go bankrupt

What happens to my benefits if I go bankrupt

You can go bankrupt if you are on benefits. This includes tax credits, universal credit, housing benefit, PIP or DLA. But will you be able to keep this money and what happens if you have overpayments?

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Will your benefits be cancelled if you go bankrupt?

Although it sounds scary, going bankrupt could be a sensible move if you are on benefits. Rest assured, non of the benefits you currently receive will be cancelled or affected in any way.

You may be receiving universal credit, working tax or child tax credits. Possibly housing benefit, PIP or DLA. Whatever benefits you are paid, it does not matter.

The amounts you receive will remain exactly the same. They will continue to be paid into your bank account as normal whether this is weekly, four weekly or monthly.

If you aren’t already using a basic bank account, you will need to open a new one for your benefits to be paid into once you are bankrupt.

Can any of your benefits money be taken from you?

As a matter of policy, the official receiver will not take any of your benefits from you if you go bankrupt.

When you complete your application form, you do have to list all the different types of benefits you receive in the income section. But don’t worry, non of this money is at risk. If benefits are your only source of income you won’t have to make any further payments towards your debts.

The only time this could change is if you get a job during the year you are bankrupt.

Where you are working and also receiving some benefits, the official receiver will consider your total income. If you have a surplus over and above what you need to live on, you will be asked to pay this towards your debt for 3 years. It is assumed any surplus comes from your earned income.

If your income is made up of benefits only, you will not have to make ongoing payments towards your debts after you go bankrupt.

What if you owe money in because of previous overpayments?

You might owe money because of a past overpayment of benefits. Common examples of these are overpayments of tax credits, housing benefit or income support.

These debts can be included in bankruptcy.

In 2013 the Supreme Court ruled in a case known as Nortel and Lehman. The Court confirmed that bankruptcy includes all liabilities that arise from a contractual or statutory relationship that existed before the date of the bankruptcy.

As such as long as the overpayment was a mistake (not because of a fraudulent claim), these debts are included. This applies to all benefits overpayments.

It is common for DWP to claim that they are still allowed to make deductions from ongoing universal credit payments to recover previously overpaid tax credits. However, legally speaking, if you subsequently go bankrupt this is not allowed.

On benefits and need more advice about going bankrupt? Give us a call (0800 044 3194) or complete the form below and we’ll call you.

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Comments 4

  1. Adam

    Hi, I’m considering bankruptcy. My only income is benefits, which I understand means I’m unlikely to be subject to an IPA. However in June 2023 I’ll start to get my private pension, which will include a lump sum; would I be forced to pay that into the bankruptcy estate if I were to file for bankruptcy now?

    1. 26.03.2021

      Hi Adam

      You need to worry. Your pension lump sum would only be at risk if you elected to take it while you are bankrupt. Remember, bankruptcy normally lasts for just 1 year. So as long as you go bankrupt latest May 2022 (meaning you will be discharged in May 23), there will be no problem. You can then take your pension lump sum in June 23 if you wish and it will be yours to keep.

  2. Simon

    I declared myself bankrupt in Jan 21 and received the order advising this has now occurred. My wife works but my only income, since October 2020 is benefits. Since being bankrupt, after some digging around, it came to light that the council had actually UNDERPAID our housing benefit since August 2019 when they failed to note our eldest started university. They have now paid us a lump sum of £905 in underpayments.

    I have notified my bankruptcy person , and asked if we are ok to keep this, They have said they are going to speak to the council to find put more. Should we be able to keep these funds?

    1. 23.02.2021

      Hi Simon

      The policy regarding benefits and bankruptcy is that the official receiver will not take any of your benefits income from you. As such, if your only source of income is benefits, they would not ask you to make a monthly payment towards your debts even if on paper you have surplus income. Given this it also follows that if you receive a windfall because of a benefits underpayment while you are bankrupt, this is also yours to keep. The official receiver won’t touch it.

      Note, this is a policy followed by the OR. It is not the law. As such it could be subject to scrutiny on a case by case basis. However, I have never heard of it being ignored.

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James Falla
I have been advising people on how to solve their debt problems for over 20 years. During this time I have helped many people go bankrupt. I am an FCA Approved Person and the Managing Director of Wilmott Turner Financial Services (owner and operator of Bankruptcy Expert
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