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Tax Credit Overpayments and Bankruptcy
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Tax Credit Overpayments and Bankruptcy

Tax Credit Overpayments and Bankruptcy

Tax credit overpayments or other benefit debts can be very difficult to deal with, especially if you are on a low income. Going bankrupt can write these debts off.

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Can tax credit overpayments be included in Bankruptcy?

If you owe money to HMRC as a result of tax credit overpayments it could cause you considerable financial difficulty. HMRC are likely to collect the debt by reducing your future payments.

However even though the debt is owed to HMRC it is still unsecured. As such it can be treated in the same way as any other unsecured debt and included if you go Bankrupt.

Once you are bankrupt HMRC are not allowd to make further deductions from ongoing tax credit payments you continue to be due. You will receive the full payment from then on.

The only time a tax credit overpayments cannnot be included in bankruptcy is if they have been incurred as the result of fraud. Where fraud has been established these debts remain even after bankruptcy.

Is Bankruptcy the right option if you have tax credit overpayments?

Whether Bankruptcy is the right solution to solve a tax credit overpayments problem depends on your wider circumstances. First you must consider how much you owe to HMRC.

If the overpayment is your only debt and you can repay it within 12 months it may be best to simply agree a repayment plan direct with HMRC.

Where you are unable to afford this rate of repayment you then need to consider other factors such as the total amount of unsecured debt you owe overall and the affect on your home or car.

If the total amount of unsecured debt you owe is less than £20,000 and you are not a home owner you should also consider a Debt Relief Order (DRO).

Can Bankruptcy help if you are a Home Owner?

If you are a home owner you need to think very carefully before going bankrupt. The issue is that your home could be at risk.

If you have little or no equity then bankruptcy could be an ideal solution to help you deal with unsecured debts including tax credit overpayments. However if there is equity the risk to your home increases significantly. You might even be forced to sell.

Given this where you are a home owner with equity it may be better to consider an alternative debt solution such as an Individual Voluntary Arrangement (IVA) or Debt Relief Order.

Want further advice about including benefits overpayments in bankruptcy? Give us a call (0800 044 3194) or complete the form below.

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Comments 8

  1. Steve

    Sister owes 12k in tax credit overpayments. If included this will push her from DRO to bankruptcy. I assume it was overpaid as a result of actual earnings being greater than estimated. I have concerns that they will say it’s fraud as she hasn’t updated her earnings every month as opposed to yearly like most people with no fixed wage do. Sister cannot work and is in receipt of only disability allowance. Any thoughts ?

    1. 23.09.2019

      Hi Steve

      If your sister has tax credit debt these have to be included in a DRO application. As such if this pushes her total over £20k then she does not qualify I am afraid. She will therefore have to use the bankruptcy option. This is really nothing to be too concerned about. The two solutions give basically exactly the same outcome for her.

      She will not be accused of fraud as a result of going bankrupt. It is not the place of the Official Receiver to suggest fraud. If HMRC felt that a fraud had been committed they would have already taken it up with her. If they have not and they believe it is a non intentional mistake then she will be fine. If she goes bankrupt this debt will be included.

      Given your sister is on diability and cannot work and she is not a home owner I suggest bankruptcy would be an ideal solution for her.

  2. Bill

    My wife and I went bankrupt in June 2019. Our tax credits was transferred to Universal credit on 27/07/19.

    Our children were awarded Disability living allowance at the end of August 2019 backdated to June 2019. This meant there was a recalculation of our Tax credit award and a £1600 payment shows as not paid. Tax credits have taken this and paid it towards previous overpayments that are included in our bankruptcy.

    I have spoken to hmrc who said basically tough its their policy. Are they allowed to do this?

    1. 10.09.2019

      Hi Bill

      This is a complex situation. Your tax credit overpayment debt has quite rightly been included in your bankruptcy. If during your bankruptcy HMRC then decide your tax credits were incorrectly calculated and award a lump sum payment to you strictly speaking they cannot keep it. However neither can you. It would be regarded as a windfall and as such would not come to you regardless. HMRC should actually pay this money to the official receiver.

      If you want to investigate this further I suggest you discuss it with your official receiver. However generally speaking they will probably not be too bothered to try and chase it. They would only be concerned if they hear that you have actually received the money……

  3. Sebastian


    I have been recently successfully discharged after 1yr bankruptcy. about 3 weeks later i get a letter from HM Revenue asking for 3,5k back for overpaid tax credits.

    The exact amount looked familiar to me so i checked my bankruptcy papers and it was indeed included/on there as Avantis Credit Ltd, which functions as HMRCs debt collector.

    I called HMRC and the adviser basically shrugged me off and told me i still have to pay it because a bankruptcy only freezes HMRC debts but doesn’t wipe them. My internet research however disagrees. Given that i don’t seem to get anywhere with them i don’t know what to do now. Please help me…..

    1. 25.06.2018

      Dear Sebastian

      I can confirm that the information you received from HMRC is incorrect. Over paid Tax Credits are provable debts in bankruptcy (as long as they were not incurred through fraudulent means and simply a mistake). As such they are certainly included and written off if you go bankrupt.

      This rule is made clear in Section 40.44 of the Insolvency Service Technical Manual.

      I suggest that you speak to the Official Receiver who was dealing with your case and inform them that you have received this correspondence from HMRC. They will deal with it for you. You might also like to call HMRC back and highlight the rule in the technical manual to the adviser you speak to…..

  4. Rosie

    Hi, Please can you help us.

    HMRC are asking us to pay back child tax credit and working tax credit from 2008 to 2010. The final decisions for our disputes were made on 12th August 2011 and 4th February 2010. We have not paid back any money due. HMRC say that they cannot change or review their decision and ask us to pay the money back.

    We have proof of our conversations with a representative from HMRC who has pointed out where all the mistakes have been made and had told us to dispute the overpayments which we had done, but they stand by their decision and are asking for payment.

    HMRC made a mistake with our incomes due to not accurately recording both incomes. We feel that they did not meet their responsibilities as in the HMRC charter. At no point have they accepted responsibility for this. We explained to them why we could not meet our responsibilities within the 30 days of the award notice and this was due to exceptional circumstances – our home was completely flooded and my best friend had died at the same time as you can imagine a very stressful and emotional time. The child tax credit overpayments were also miscalculated at no fault of ours as the incomes were already provided the representative points this all out on the recorded telephone call.

    Our question is where do we stand with regards to the overpayment being 6 years old? Are they statute barred meaning they can no longer be enforced? Do you think that we are not going to get anywhere with this or should start to pay HMRC?

    1. 13.04.2018

      Hi Rosie

      Debt incurred due to the overpayment of Tax Credits does become statute barred after 6 years. Given this I would write HMRC a strongly worded letter confirming that the debts are statute barred and that they must stop their collection activities accordingly.

      If you would like a statute barred letter template please send us a request e-mail using the “e-mail our experts” button on this page.

      Note: The statute barred rule only stops collection of the debt via court action. If you subsequently become eligible for tax credits HMRC can still recover the original overpayment by reducing your current entitlement payments.

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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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