Disability benefits such as Personal Independence Payment (PIP), Disability Living Allowance (DLA), and Attendance Allowance (AA) are meant to cover the extra expenses you have because of the disability.
So do you have to use this money to repay debts? To someone who isn’t disabled, your benefits may look high – but you have a lot of costs other people don’t have.
In 2022 this is a real issue for many people getting disability benefits as the cost of living rises and benefits have not kept pace with inflation. 29 per cent of disabled households are in serious financial difficulty, compared to 13 per cent of non-disabled households.
You may be in one of the following situations:
- credit card and loan payments that were manageable a year ago may now not be;
- you may be using more credit every month to just get by. So your debts may be going up and each month gets harder;
- you may have stopped paying some debts as you are behind with important bills.
I’m going to go through the main debt solutions so you can see how disability benefits are handled in each. They aren’t all the same!
I will start with bankruptcy as that is simple and looking at this makes it clear how the government thinks benefits should be treated.
Disability benefits & bankruptcy
In bankruptcy, if someone has “surplus income” each month, you have to pay that to the Official Receiver for three years, this is called an IPA. In practice, the large majority of people who go bankrupt do not have to make IPA payments.
The rules used to assess what surplus income is are published. Here is an extract from the IPA part:
35.72 State benefits only source of income
There is no requirement [for the Official Receiver] to complete the IPA calculator where the bankrupt’s sole source of income is state benefits.
So if your only income is benefits, including disability benefits, then the OR won’t even bother to think about whether you should pay an IPA – you won’t have to. The government accepts that you don’t have any spare money when your only income is benefits. Here you still have to complete the Income & Expenses section of the bankruptcy application, but it’s a formality
Where you have some other income in addition to your benefits – part-time work or an employer’s pension pehaps – your disability benefits are included as income but the Official Receiver will allow additional expenses for the extra costs of your disability. When you are completing the bankruptcy application it’s a good idea to get help from a debt adviser about this. And you should always get debt advice before deciding to go bankrupt.
Disability benefits & a Debt Relief Order (DRO)
A DRO is a very simple form of bankruptcy. If you are renting and your debts come to less than £30,000 and most or all of your income is from benefits, this may be a good option for you, see What is a DRO?
The debt adviser that is setting up your DRO will list your income and expenses
As with bankruptcy, the government thinks you need disability benefits to cover your additional expenses. Not to pay your creditors.
The debt adviser will list your disability benefits as “income”. But the Insolvency Service says:
On-going payments of PIP, DLA and AA can be offset under adult care costs.
This offset is acheived by your debt adviser adding a line added into your “expenses” that is exactly the same amount that you are getting in disability benefits, called something like “adult care costs”. Or “child care costs” if you are getting DLA for one of your children.
So the extra income you have is effectively cancelled out by the extra costs. If an IVA firm (see below) says you can afford to pay more than £75 a month to an IVA, you may still be eligible for a DRO because the DRO treatment of disability benefits is more friendly.
If all your income comes from benefits after this offsetting of the disability benefits in practice you won’t have more than £75 a month “surplus income” left. Benefits are not that generous, there is usually little or nothing left after you have paid all your bills and everyday expenses!
And you will often pass the “not more than £75 a month surplus income” test for a DRO, even if you have other income, eg from a job. Talk to a good debt adviser about this.
Disability benefits & an IVA
IVAs are more complicated. It is unusual for an IVA to be the best option for someone getting disability benefits.
You should only think of an IVA if you have a house with equity in it or a valuable car (not a mobility vehicle). If you don’t have assets to protect, look at bankruptcy or a DRO instead of an IVA:
- bankruptcy and DROs will cost a lot less and be over quicker than an IVA;
- they don’t run into the big problems that IVAs have. Over a third of IVAs fail.
- an IVA has exactly the same bad effect on your credit score as bankruptcy.
Your IVA firm will assess your income and expenses to decide what you can pay every month. Unlike bankruptcy and DROs, most IVA firms think you can use disability benefits to make monthly payments. And many IVA firms assume the standard guidelines for expenditure should apply to everyone, even though you will have much higher costs than the average family.
It may help if you think about your additional costs before your phone call and make some notes to work through. Do you (or your child) need a special diet? Additional heating and/or laundry? Additional transport costs if you can’t use public transport? Someone to clean the house or collect your shopping? Does your autistic son go swimming several times a week? Do you often go to the hairdresser as your arthritis prevents you from washing your own hair? Do you have to replace household objects more often because a disabled child breaks them? etc etc
Talking to a good debt adviser can help you get a detailed list of these expenses. IVA firms are not debt advisers – ask your local Citizens Advice for help with this.
If you have a house with equity to protect and very large debts, then it may be that an IVA is a good option. Here it may be necessary to use some of your disability benefits to make the IVA payments. But talk to Citizens Advice about this as you need to be sure that you will still be able to pay the IVA even if your mortgage payments increase in the next few years.
Disability benefits & debt management
When you could manage to clear your debts reasonably quickly if only interest is frozen, debt management is often better than an insolvency option like bankruptcy, a DRO or an IVA. There are two sorts of debt management – DMPs and payment arrangements.
A DMP (Debt Management Plan) is set up by a firm such as StepChange, then you pay the firm each month and the firm divides your money between the creditors.
The DMP firm will assess your income and expenditure. So you need to think about what all your extra disability costs are before you talk to the DMP firm. See some of the suggestions I listed above in the section about IVAs. Although DMPs are flexible so your payments can be reduced if necessary, don’t underestimate your expenses at the start. You want a budget you know you can comfortably live on for a year or more, not scrape by on for a month or two.
Payment arrangements work much like a DMP. The difference is you talk to each of your creditors to set how much you pay them each month. This includes talking through your income and expenses. Explain about your disability and the extra costs you have.
If you only have a few creditors and you are confident, setting up payment arrangements may be relatively easy. If you have a lot, or talking to them makes you anxious, it’s better to phone StepChange and talk to them about a DMP. Then StepChange does all the work for you.
Priority debts and disability benefits
Priority debts are things like rent/mortgage arrears, council tax, car finance and energy bills. There is a list of them here.
It can be harder to make a payment arrangement with a priority creditor. And this may be made worse if your expenses are high because of your disability. Talk to Citizens Advice who can help you with this.
What option is right for you?
This article has concentrated on looking at how your disability benefits are treated in different debt solutions.
But the best debt solution for you depends on your full situation, not just your disability benefits. So contact your local Citizens Advice or, if you would prefer to speak to someone on the phone, call National Debtline on 0808 808 4000.