What happens to my benefits if I go bankrupt
- 22 Nov 2021
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?
Included in this article:
- Will your benefits be cancelled if you go bankrupt?
- Can any of your money be taken from you?
- What if you have overpayment debt?
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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.
I am on benefits due to a brain aneurysm I also sold my house last year because I couldn’t afford the mortgage and I was petrified my ex who was abusive would come and take it off me at some point. I am still scared.
I gave money from the sale to someone who gave me money years ago for the house and then my ex can’t have it either. I have so much debt also everything went pear shaped after my aneurysm. I struggle to do even basic things these days.
Can I go bankrupt or will they want the money I gave back? I just don’t know what to do other than turn back time and not survive the aneurysm.
Hi Lisa
Give what you have said, going bankrupt might cause you problems.
If you sell a property and give away the proceeds within 5 years of going bankrupt, this would be treated by the Official Receiver (OR) as a transaction at undervalue (if the payment was just a gift). The OR would then have to try and get back the money for the benefit of your creditors. If you were able to prove that the money you paid was in fact to repay a debt, this would also be an issue as it would be a preferential payment.
Given what you have said, the money you gave looks like it would have been a preferential payment. As such, I believe that despite your circumstances, the OR would have to demand the fund’s return from the person you gave them to. If they refuse, the OR can take legal action against that individual.
Even though you owed this person money, unless they can show that they had a legal charge against the property and were therefore a secured creditor, the OR would consider it a preferential payment. The only way around this might be to wait 2 years from the date you paid the money. After 2 years, preferential payments can’t be reclaimed by the OR. However, for this to hold water you would have to prove that the money lent to you to buy the house was always meant as a loan and not just a gift…..
If proving this would be difficult, I would advise you to avoid bankruptcy. You would be better off considering either and IVA or debt management plan to deal with your debts.
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?
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.
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?
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.