A reader, Mrs H, asked:
This article looks at the general problem of getting this sort of refund. It also applies to PPI refunds – many PPI claims sent in just before the end August 2019 deadline are still waiting for a decision. And to other refunds such as from Provident or catalogues.
If you get a refund and you still owe money for that debt, the refund may be used to reduce what you owe – so you don’t get any cash at all, or a lower amount. This doesn’t help you at all as you don’t have to pay that debt as it’s in your DRO. But it won’t affect your DRO at all.
You have to report getting a refund when you are in a DRO
After starting a DRO, there is a year in which you don’t make any payments to your debts at all and then your debts are wiped out.
The DRO rules say that during this year:
you must tell the official receiver about any money or assets you receive, or any increase in your regular income.
So if Mrs H starts a DRO and then finds out she is getting a payday loan refund, she has to tell the Official Receiver (OR).
Getting a lump sum can be a problem for a DRO
In bankruptcy or an IVA, Mrs H would lose the refund money – it would go to the OR or to her IVA firm.
In a DRO though the Offical Receiver can’t take the money. But instead the refund may mean a DRO is “revoked” – that is the legal term for being cancelled.
You can’t start a DRO if you have savings of more than £1,000. So when 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 should be ended.
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.
When you are trying to decide whether a payday loan refund could be a problem, I suggest you assume that a DRO would be revoked if the refund is over £1,000.
Does it matter if her DRO is cancelled?
If you aren’t expecting this, getting some “good news” about winning a complaint and then finding your DRO is cancelled can feel very unfair, a big shock.
But normally this just turns out to be a nuisance, not a big problem, if it happens. Because if your refund isn’t large enough to clear most of your debts, you can go bankrupt instead.
With the refund money it’s going to be easy to afford the bankruptcy fees!
And as Mrs H qualified for a DRO, she must have little or no spare income each month, so she won’t have to make any monthly payments in bankruptcy. The bankruptcy will be all over in another year.
Mrs H had expected to be debt-free at the end of her year’s DRO.
If the worst happens and her DRO is revoked, she will still be debt-free, it’s just going to take a bit longer to get there.
So she gets to the same destination, with a diversion along the way.
She may also be able to use some of the refund money to cover any urgent and important expenses before applying for bankruptcy. Perhaps service the car, get new shoes for the children or replace a washing machine that had stopped working. If she had had any rent arrears, it would great to clear 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 should keep the receipts for any of the money you spend as the Official Receiver is likely to ask to see them when you go bankrupt.
If Mrs H’s debts are large and she doesn’t expect a big refund, then it’s probably best to go for a DRO now and not delay:
- if she gets no refund, she has sorted her debts out sooner;
- if she gets a refund of under £1000, she can keep it;
- if it’s more and her DRO is revoked, she just applies to go bankrupt.
If the refund may be large, she could postpone her DRO
It can be hard to guess what a refund might be. But if Mrs H knew she had paid a lot of interest on her loans for years, then it could be large.
Here it’s best to talk to an adviser that sets up DROs about whether it might be better to wait and see what the refund may be.
If Mrs H decides to wait, she should try to avoid borrowing any more money.
And she should also treat her non-priority creditors the same – probably by paying them all a token £1 a month. Paying £1 a month to a debt isn’t going to clear it, so this isn’t a good long term choice, but it can keep a creditor happy that she isn’t ignoring the debt.
This works for non-priority debts such as loans, credit cards and catalogues. You can’t make token payments to priority debts such as rent or council tax arrears. Her debt adviser will also be able to discuss which debts Mrs H can make token payments to and how she can manage any priority debts before her DRO is set up.
What if you get the refund after your DRO has finished?
This shouldn’t be a problem. It has happened to thousands of people with PPI refunds.
This article is kept updated.