Most people would be delighted to get a letter saying a bank has looked again at their PPI reclaim from a couple of years ago, decided they got it wrong and that a refund should have been paid so a cheque for £2,000 is on the way.
But for Mrs P this wasn’t good news. Her first thought was not what to do with the money, but would it make a difference to her Debt Relief Order. She talked to the debt adviser who had set up the DRO, who told her to inform the DRO Unit at the Insolvency Service right away.
This article look at this unusual situation where PPI is being repaid to someone in a DRO who has not recently complained. For the more common cases:
- if you have started a PPI complaint before applying for a DRO, discuss this with the adviser setting up your DRO as it may be better to wait until the PPI complaint is resolved;
- if you are in a DRO you should not put in a PPI complaint.
Getting a lump sum can be a problem for a DRO
You can’t start a DRO if you have savings of more than £1,000. If you get a lump sum during the year your DRO lasts, the Insolvency Service has to decide whether it is so large that your DRO will be ended – their term for this is “revoked”.
I’ve written about this in more detail in What if I get more money in a DRO? which has the details of how the Insolvency Service has said it will make the decision to revoke or not. And inheriting money is a special case, see Inheriting money in a DRO.
Mrs P’s DRO was revoked
In Mrs P’s case, the £2,000 PPI refund was over the level where the Insolvency Service says it will usually choose to revoke. The IS however does have discretion, so I thought it was worth Mrs P emphasising that:
- even £2,000 wasn’t going to make any impact of her debts, which were well over £15,000;
- she hadn’t asked for this refund – her original PPI complaint had been years before and had been completed as far as she knew.
But after a month or so the Insolvency Service said her DRO would be revoked.
Bankruptcy was her only sensible option
If she had got a larger sum – perhaps £4-5,000, she could have tried offering a full and final settlement to her debts. With an even larger amount she could have paid off such a lot of debt that the rest would be manageable.
But with “only” £2,000, she had no practical alternative to bankruptcy:
- having the money meant it was going to be easy to pay the bankruptcy fees!
- as she had no spare income each month, she wouldn’t have to make any monthly payments in bankruptcy, so the bankruptcy would be all over in another year.
She had expected to be debt free at the end of her year’s DRO. Now she was still going to be debt free, it was just going to take another 6 months or so to get there – same destination, just a diversion along the way.
If she had any urgent and important expenses, she could also use some of the money to pay those – perhaps her car needed a service, the children needed new shoes or her washing machine had stopped working. If she had had any rent arrears, it would have been good to repay those. I’m not talking here about going on holiday or having the best Christmas ever, this has to be necessary expenditure. If you find yourself in this situation you need to keep receipts for any of the money you spend as the Official Receiver is likely to ask to see them when you go bankrupt.
Was revocation really the best choice by the IS?
From the debt adviser’s point of view the switch to bankruptcy was straightforward, the obvious next step. But for Mrs P the whole process was pretty stressful, especially as she felt that it wasn’t her fault and she didn’t even want this money. And there will have been no payout to her creditors in bankruptcy so they have gained nothing at all.
At the moment these cases are pretty unusual. But it is possible that the Plevin PPI ruling could mean more old PPI complaints are re-opened. I think the Insolvency Service might want to rethink its policy and exercise its discretion more frequently in this type of case.