Tax Credit Overpayments and Bankruptcy
- 15 Sep 2022
Tax credit overpayments are included if you go bankrupt. Any payment plan you have set up with HMRC can be cancelled. If you are still eligible for tax credits, these should be paid as normal.
Included in this article:
- Can tax credit overpayments be included in Bankruptcy?
- Is Bankruptcy the right option for you?
- What if you are a home owner?
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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 allowed 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 cannot 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 £30,000 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.
Hi, I went bankrupt in 2018. I have been sent a letter advising me i was overpaid tax credit in 2004,2011.and 2013 do i have to pay this ?
Hi Lesley
Given you went bankrupt after the date the tax credits were overpaid these debts should have been included in your bankruptcy. As such you should not have to pay these. However as you did not know about the debts, the official receiver dealing with your case also did not know about them and was not able to write to HMRC at the time.
You should contact the organisation chasing you for the money and confirm the date you went bankrupt and the reference. If you continue to have difficulty you should contact the official receivers office that dealt with your case.
If you now receive Universal Credit paid by DWP, it is possible that HMRC have handed over the collection of the overpaid tax credits to them. It is my understanding that these debts can’t be collected or enforced if you previously went bankrupt. However, it often seems to be the case that DWP chose to ignore this and deduct money from ongoing benefits to recoup the debt they say is owed. If this happens, then unfortunately it seems very difficult to argue against it.
Hi there I’ve just become bankrupt and I did not know that I had a outstanding balance with tax credits. They are deducting this from my universal credit housing costs which is causing me difficulties. Could I get this written off?
Hi Rosie
Yes, tax credit overpayments are included in bankruptcy. You should inform the official receiver about this debt. They will contact HMRC and the deductions should stop because the debt is included in your bankruptcy.
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 ?
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.