Can benefits be taken to pay debts?
This is a guest post by Sara Williams, who blogs about everything to do with debt and credit ratings at Debt Camel.
If your only income is benefits, what happens if you can’t afford the monthly repayments to your debts?
There is a myth that you don’t have to use benefits to make debt repayments. Although there is a grain of truth in this, it is much too simplistic and you can get in a mess if you think you can rely on this. So let’s look at what you can do.
Why health problems and debts often go together
It’s very, very common for people getting disability benefits to have problem debt. Everyone’s case is different, but for most it’s some combination of these reasons:
- debts that were manageable when you were working aren’t any longer;
- your expenses may have risen: trips to hospital, expensive prepared food as chopping and cooking is harder, extra heating because you are at home all day, etc
- often you may have expected to “get back to normal” soon, and so just put your extra expenses on a credit card for a while; and
- money just doesn’t seem that important when you have health worries.
Being ill and worried takes a lot of mental energy. It’s natural to have let your finances drift, not feeling you have the strength to manage the letters or talk to a creditor. And if you have mental health problems this is even harder!
You may regret the size of your debt, but don’t feel guilty about it – it’s absolutely normal.
Getting a plan
Start with a list of your debts – who you owe, how much you owe, what you are supposed to pay them every month. Put everything on there, even debts that don’t seem like problems at the moment.
Then you need to prioritise the important ones – rent, council tax, gas/electric etc. If you owe money on any of these, go to your local Citizens Advice because you need expert help. I’m going to assume you don’t have any of these priority debts, you just have loans, credit/store cards, catalogues etc.
Is it the interest that is the problem?
If you could repay the debts within a reasonable time if they just stop adding interest, your best option could be a Debt Management Plan (DMP). In a DMP, your creditors are asked to freeze interest so all your monthly payment reduces the debt.
You can phone your creditors and making an arrangement to pay, or you can use a DMP firm. A DMP firm does all the communicating with your creditors, so using a DMP firm is very sensible. StepChange is the UK’s largest DMP firm.
How much you pay each month is the big question… should you have to use your disability benefits to clear your debts?
The answer is No, you don’t have to. When a DMP firm is looking at your income & expenditure, it will want to list all your benefits as income – because they are income. But it should also be prepared to list all the extra expenses you have because of your disabilities – you may well be paying a lot more for some things than other people are.
But if you don’t use your benefits, then you may be paying so little each month that your DMP does on for a very long time. A 15 year DMP is not a good idea! In this case you need to look at other options.
If you can’t pay your debts in a reasonable time even if interest is frozen, then you need to consider one of the three “insolvency” options in England and Wales. Deciding between this is sometimes complicated, but the following is a rough guide.
Debt Relief Order
If your debts are less than £20,000, you are renting and you don’t have other expensive assets (normal household stuff doesn’t count), look at a Debt Relief Order (DRO). If all your only income is from benefits, you will always meet the “low disposable income” test for a DRO.
In a DRO, you don’t have to make any monthly payments at all, your creditors aren’t allowed to take you to court or send bailiffs and your debts are wiped out after a year. If you qualify for one, it is probably the perfect solution for you. You can’t set up a DRO yourself, go to your local Citizens Advice and ask about one.
The next best option if you don’t have a house with equity or other assets is bankruptcy – don’t be scared of the name! It’s simpler and easier than it used to be – you don’t have to go to court, it’s just an online application, your name isn’t published in the local paper etc.
In bankruptcy some people have to make monthly payments for three years. But if your only income is benefits, you won’t have to make any monthly payments. So you can use all your disability benefits to cover your extra costs.
Bankruptcy fees are stupidly high, but go to your local Citizens Advice and they can help you apply for a grant to cover these. They can also give you proper debt advice – you may have better options than bankruptcy.
Individual Voluntary Arrangement (IVA)
If you have a house with equity, then a DRO isn’t possible and bankruptcy won’t usually work well so you may have to look at the third type of insolvency: an IVA.
Here you make monthly payments, for 6 years if you have a house with equity. IVA firms treat your disability benefits as income but you need to insist that your higher expenses are taken into account. A big problem with IVAs is that they can fail. About a quarter of them collapse because people can’t afford the monthly payments after a while, so if you go for an IVA, you have to be realistic about what your expenses are. 6 years is a long time to commit to making monthly payments and you can’t assume they can be reduced later.
An IVA has to be approved by your creditors so the monthly payments have to be big enough for this. This usually means using some of your benefits to make these payments, otherwise you won’t be able to afford them. That’s why this option isn’t such a good choice if you are living on benefits… but with a house to protect, you may not have any better options.
Sell the house?
For many people, selling their house is the absolute last resort. But if all your money is in your house and your income has dropped, you are “asset rich and cash poor”, which can be a very uncomfortable way to live.
Also have a think about the house and your health. If you have had some good adaptions made – perhaps a wetroom put in, or a stair lift, then obviously you want to keep it. But if you are just living in a couple of the rooms, then having a large house is expensive (council tax, heating, repairs etc) and may be impractical in the longer term.
Getting some help to decide
I hope this has given you a helpful overview. The two places I have mentioned for debt advice – Citizens Advice and StepChange – can both help you look at your whole situation and find the right way forward.