Disability benefits such as Disability Living Allowance (DLA), Personal Independence payment (PIP) and Attendance Allowance (AA) are meant to cover the extra costs you get because of the disability. So is it right to use this extra money to pay off debts? Can your creditors make you do this?
That may sound a bit abstract, but it leads to a very practical question – if you need a Debt Management Plan (DMP) or an IVA, then you show your creditors your income and expenditure details so they can assess whether the monthly payments you are offering are reasonable. Should you include any disability benefits as “Income” on the information which is sent to your creditors?
On the one hand you don’t want to lie about your finances, on the other hand you do have extra expenses because of the disability and it can be difficult or sometimes embarrassing to have to explain these.
Handling disability benefits in debt management
There are two alternative ways – they both give the same end result. Whichever you choose, you will need to inform your creditors what you are doing and why.
The first approach is that you don’t include the benefits as your Income but you also exclude any costs associated with the disability from your expenditure. Then in your cover letter if you are setting up a DMP, you should explain this, for example “My 12 year old son suffers from Autism and gets Disability Living Allowance, but I have haven’t included this as Income and I have also left out the additional expenses which that income covers.”
The second approach is that you include the benefits as income but you add extra lines to your Expenditure with details of what the additional expenses are. This is the approach a debt adviser will usually take.
Which alternative is better for you may depend on what the extra costs are. If it is very clear what the extra costs are, then the second approach may appeal. But it is a sad fact that people often find the costs associated with a physical disability easier to understand than those with mental problems such as autism.
Even with physical conditions, the disability benefits are there to help you manage the situation in the way that is best for your family and your choices need not be the same as the ones other people might make. So if you are exhausted being up several times every night with a distressed child, choosing to employ a cleaner isn’t a luxury at all – it’s what you need to get by. If you may prefer to adopt the first approach and not spell out what the extra expenses are, it feels less as though you have to justify yourself.
I would like to use some of the money to speed up my DMP
That’s your choice. But think twice about this – very often you may have been spending less on replacing/mending/cleaning things around the house because the disability money that was meant to help you has been going to the debts.
It’s less of a worry with a Debt Management Plan than an IVA (see below), because if your circumstances change then you can just change the DMP payment. This page looks at how far you should try to cut back to speed up debt repayments, but if you are comfortable with what you are proposing, then fine.
Of course, also make sure that your DMP will go as fast as possible by not using a commercial DMP firm that charges you fees!
Setting up an IVA
You need to discuss your disability expenses in detail with the Insolvency Practitioner (IP) you are talking to. This is not like discussing your debts at a Citizens Advice Bureau – the person you are talking to at the IVA firm is unlikely to know much about benefits or disabilities – they aren’t going to prompt you for things you might have forgotten because they don’t know enough about the area.
Too many IPs seem to start off by assuming that the standard guidelines for expenditure should apply to all families. It may help if you have a think about your additional costs before your phone call and make some notes to work though.
You need to think about things which you and your family do that wouldn’t be needed if it weren’t for the disability. A few examples:
- Your utility costs may be high, but electricity powers your wheelchair, your electric bed, your hoist etc and the heating has to be on a lot.
- Your IP may not think that you need to take your autistic son swimming several times a week, but you know that being in the water is relaxing for him and lets him work out the stress that being at school tends to induce.
- Your IP may think your expenditure on hairdressers is excessive, but your arthritis prevents you from washing your own hair, etc.
Although there are standard guidelines for acceptable expenses in an IVA, there is no reason why your expenses can’t be higher than the guidelines and additional expenses can be included if there is a good reason for them.
If you feel you are being pushed to pay more than you think you can afford, then don’t feel you have to agree because the IVA payments will be lower than those on your debts. Five years is a very long while to live on an inadequate amount of money and you may find your expenses increase during the term if your condition gets worse or as the children get older. IVA payments are not very flexible, you can’t assume they will be decreased later if your expenses go up.
Instead, you could try talking to a different IVA firm – try contacting StepChange and talking to them about it. And also look at the alternatives to an IVA.
But if you have a house with equity and an IVA looks like your most sensible option and you feel you can afford the amount being proposed as the monthly payment, even though that includes some of your disability benefit money, then that is your choice. There is no rule which says that you can’t spend the money in this way if you want to.
Benefits and bankruptcy / DROs
In bankruptcy, if you have “surplus” income each month, you have to pay that to the Official Receiver for three. years. The rules used to assess what surplus income is are published in detail. Here is an extract from the benefits part:
“A [monthly payment] should not be sought where the bankrupt’s only source of income is state benefits. In the context of this chapter “state benefits” refers to all forms of income supplement and support provided by central or local government including … disability living allowances …. ”
Where you have some other income in addition to your benefits – perhaps you work part-time or have a pension early on ill health grounds – the benefits income is included as income but the Official Receiver should allow additional expenses for the extra costs of your disability.
Occasionally an OR will suggest that your expenses are too large and you can afford to make a monthly payment (IPA) for three years. If this happens to you, go and ask your local Citizens Advice for help – they will be able to write to your OR and explain your extra costs and that the OR should take these into account, because if they don’t they will be in breach of the Disability Discrimination Act (1995), which is now part of the Equality Act (2010).
In a Debt Relief Order (DRO), DLA or PIP is counted as “income” however there will be a line added into your “expenditure” that is the same amount for your “disability expenses” – this is often labelled something like “adult care costs”. This means that you will often pass the “not more than £50 a month surplus income” test for a DRO, even if you are currently paying more than that amount to your creditors.
If all your income comes from benefits, you will definitely pass the DRO spare income test and will not have to make any monthly payments in bankruptcy.
So the government agrees that disability benefits are required for everyday expenses and shouldn’t be used to pay your creditors.