How debt can affect your benefits

For some people benefits play a vital role in taking the financial strain from day-to-day life. They are generally applied for when people fall into hardship, such as unemployment or fall ill, or live with a disability.

A lot of benefits are ‘means-tested’ which means that your entitlement is based on your situation and some are even capped. This can often make dealing with debt very difficult, especially if your situation gets worse.

We’ve created this guide to show you how debt can affect your benefits and what to do to if you are dealing with debt whilst on benefits.

What can happen to my benefits if I’m in debt?

What can happen to your benefits when in debt is dependent on who you owe money to.

If you owe money to credit cards, overdrafts or loans etc. then your benefits generally won’t be affected. However, if you owe money to HMRC or the DWP, then they can take recovery action by deducting amounts from your benefits before it even reaches you.

This is generally done at a rate of between 15% – 25% of your standard allowance, but it can go up to 40% if the debt you owe is considered to be fraudulent.

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How do I manage my debts whilst on benefits?

Paying back debt isn’t always an easy task. When you’re on benefits that put you on a set income that isn’t always great, it’s important to deal with your debts as quickly as possible to avoid any hardship.

However, there are ways for you to manage your debts if you are on benefits, which we have laid out below for you:

  • Check what you’re entitled to

A great way to boost the income you have coming in is to check if you are entitled to any other benefits that you may not currently be getting. Maximising the money you receive can help you ensure that you have enough to pay back your debt and keep up with your regular bills.

  • Breathing Space

If you are struggling, but are receiving the maximum amount you’re entitled to, then there is the option of asking lenders to give you ‘breathing space’. This is essentially a break from your payments to give you some time to get back on track.

This may seem pointless at times, but for a large number of companies, they would rather give you this time and get their money back rather than having to go down the route of recovery action.

What are my options for debt help if I am on benefits?

Many people believe that they cannot get debt help if they’re on benefits, but this is actually not the case at all.

As such, we’d like to set the record straight – you can enter into a debt solution if you live on benefits. Sure, there are some that have restrictions that mean you don’t qualify, but there are plenty out there that you do.

Solutions like the ones below are designed to help people in all kinds of situations, so we thought we’d lay them out for you to show that there are options out there for you.

Individual Voluntary Arrangement (IVA) *

This is a legally binding agreement between you and those you owe money to that allows you to make one reduced monthly payment instead of multiple bills each month. It’s designed to be affordable to you by basing your payments on the amount of money you have left after all your bills and necessities have been paid.

Generally lasting for five years, interest and charges are also frozen on your debts once you’re in an approved IVA. It will show on your credit report and the details of the arrangement will be posted on the Insolvency Register, which can be accessed publicly.

Once you have completed your arrangement, any remaining balances on the debts included in your arrangement will be written off.

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Trust Deed **

This solution is similar to an IVA – you will make just the one monthly payment that is deemed affordable for you. The main difference with this solution is that it will generally run for four years instead of five.

Interest and charges will again be frozen for the duration of the arrangement and details of the trust deed will be put on a register run by the Accountant in Bankruptcy (AiB) – the governing body for all trust deeds.

Any remaining balances of the debts included in your trust deed will be written off once you have completed the term, much like an IVA.

Debt arrangement scheme (DAS) ***

The Debt Arrangement Scheme is a relatively new one that was introduced by the Scottish Government. Very similar to a debt management plan, you will make one monthly payment toward your debts for a number of years until you have cleared them altogether.

This solution can last for up to 10 years, which may affect your credit rating as you will be taking longer to clear the balances. Once again interest and charges will be frozen for the duration of your DAS and will also be put on the AiB register.

Your payment plan under a DAS is known as your Debt Payment Programme (DPP). This part is legally binding and is what allows you to make a payment that is affordable to you.

Debt Management Plans (DMP)

A DMP is a solution that allows you to make an offer to pay your creditors a lower and more affordable amount towards your debts. The payment is split amongst your lenders and you will continue to pay the reduced amount until you have cleared your debts.

They aren’t legally binding, and it isn’t guaranteed that the offer you put forward will be accepted by your lenders. This also means that it may not be guaranteed that interest and charges will be frozen whilst in your DMP.

This solution can last for up to 10 years and details are also not posted on any register, however will still have an adverse effect on your credit file.

*IVAs are only available to those living in England, Wales and Northern Ireland and are subject to qualifying conditions

** Trust Deeds are only available to those living in Scotland and are subject to qualifying conditions

***DAS’ are only available to those living in Scotland and are subject to qualifying conditions