Disability benefits such as Personal Independence Payment (PIP), Disability Living Allowance (DLA) and Attendance Allowance (AA) are intended to cover additional expenses you have due of your disability.
So, should you use this money to pay off debts? For someone who is not disabled, your benefits may seem high, but you have a lot of costs that other people don’t.
In 2022, this is a real problem for many people receiving disability benefits, as the cost of living is rising and benefits have not kept pace with inflation. 29% of households with disabilities experience serious financial difficulties, compared to 13% of households without disabilities.
You may be in one of the following situations:
- credit card and loan payments that were manageable a year ago may not be anymore;
- you may be using more credit each month to get by. Thus, your debts may increase and each month becomes more difficult;
- you may have stopped paying some debts because you are late with important bills.
I’ll go over the top debt solutions so you can see how disability benefits are handled in each. They are not all the same!
I’ll start with bankruptcy because it’s simple and it clearly shows how the government thinks benefits should be handled.
Disability benefits and bankruptcy
In bankruptcy, if someone has “surplus income” every month, you have to pay it to the Official Receiver for three years, this is called an IPA. In practice, the vast majority of people who go bankrupt do not have to make IPA payments.
Rules for measuring surplus income are published. Here is an excerpt 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 when the bankrupt’s sole source of income is state benefits.
So if your only income is benefits, including disability benefits, the operating room won’t even care whether you should pay an IPA – you won’t have to. The government accepts that you have no spare money when your only income is benefits. Here you still need to complete the Income and Expenses section of the Bankruptcy Application, but this is a formality
When you have other income in addition to your benefits – part-time work or an employer pension perhaps – your disability benefits are included in income, but the Official Receiver will allow additional expenses for costs. of your disability. When filing for bankruptcy, it’s a good idea to get help from a debt counselor on this. And you should still get debt advice before deciding to file for bankruptcy.
Disability Benefits and Debt Relief Order (DRO)
A DRO is a very simple form of bankruptcy. If you are a tenant and your debts are less than £30,000 and most or all of your income comes from benefits, this may be a good option for you, see What is a DRO?
In a DRO, you cannot have more than £75 a month of “surplus income” after paying all your bills and living expenses.
Similar to bankruptcy, the government thinks you need disability benefits for living expenses. Not paying your creditors. If all of your income is from benefits, you will be considered to have less than £75 per month of surplus. And so you will qualify for a DRO.
In a DRO, disability benefits are counted as “income”. But there will be a line added in your “expenses” that is exactly the same amount you receive in disability benefits. This line is usually referred to as something like “adult care expenses.” Or “child care expenses” if you benefit from the DLA for one of your children.
This means that you will often spend the “no more than £75 per month excess income” test for a DRO, even if you have other income, for example from a part-time job or if you are currently paying much more than £75 per month to your creditors. And if an IVA company (see below) says you can afford to pay more than £75 per month to an IVA, you may still be eligible for a DRO as the DRO treatment of disability benefits is more user friendly.
Invalidity benefits and IVA
VATs are more complicated. It is unusual for an IVA to be the best option for someone receiving disability benefits.
You should only think about an IVA if you have a house with equity or a valuable car (not a mobility vehicle). If you have no assets to protect, consider bankruptcy or a DRO instead of an IVA:
- bankruptcy and DRO will cost much less and be faster than an IVA;
- they don’t run into the big problems that IVAs have. More than 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 each month. Unlike bankruptcy and DROs, most IVA companies think you can use disability benefits to make monthly payments. And many IVA companies assume that the standard spending guidelines should apply to everyone, although 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 take some notes to work with. Do you (or your child) need a special diet? Heating and/or additional laundry? Any additional transportation costs if you can’t use public transportation? Someone to clean the house or pick up your groceries? Does your autistic son go swimming several times a week? Do you often go to the hairdresser because your arthritis prevents you from washing your hair yourself? Do you have to replace household items more often because a disabled child breaks them? etc
Talking to a good debt counselor can help you get a detailed list of these expenses. IVA companies are not debt counselors – seek help from your local Citizens Council.
If you have a home with equity to protect and very large debts, an IVA may be 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 because you need to be sure that you will still be able to afford the IVA even if your mortgage payments increase over the next few years.
Disability benefits and debt management
When you manage to clear your debts fast enough if only the interest is frozen, debt management is often better than an insolvency option like bankruptcy, a DRO or an IVA. There are two types of debt management: DMPs and payment terms.
A DMP (Debt Management Plan) is set up by a company such as StepChange, then you pay the company each month and the company distributes your money among the creditors.
DMP will assess your income and expenses. You should therefore consider all of your additional disability costs before speaking to DMP. See some of the suggestions I have listed above in the section on IVAs. Although DMPs are flexible so that your payments can be reduced if necessary, don’t underestimate your expenses initially. You want a budget that you know you can comfortably live on for a year or more, not a month or two.
Payment agreements work much like a DMP. The difference is that you talk to each of your creditors to set the amount you pay them each month. This includes talking about your income and expenses. Explain your disability and any additional costs you have.
If you only have a few creditors and are confident, setting up payment arrangements can be relatively easy. If you have a lot of them, or if talking to them makes you anxious, it’s best to phone StepChange and tell 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 financing, and energy bills. There is a list here.
It may be more difficult to reach a payment arrangement with a priority creditor. And it can be made worse if your expenses are high because of your disability. Talk to Citizens Advice who can help you.
Which option suits you?
This article has focused on how your disability benefits are handled in different debt solutions.
But the best debt solution for you depends on your overall situation, not just your disability benefits. So contact your local Citizens Advice or, if you prefer to speak to someone on the phone, call National Debtline on 0808 808 4000.