Benefit Overpayment and Bankruptcy

Hi,

I have a client who has significant amounts of debts, which also include nearly £50K of benefit overpayment (ESA, HB and CTR) and she is considering applying for bankruptcy.

An MR was submitted in November time last year (I wasn’t involved with the client at this point) and we are chasing this up as no-one has received a decision.

My question is does the benefit overpayment get included in Bankruptcy (not my area of expertise) and if they apply for this will we still be able to appeal the overpayment decision?

I understand that it doesn’t get included if its benefit fraud but I’m not sure whether this is classed as this - we know she’s owes some of the overpayment but there is a dispute over the dates and from my calculations it’ll be significantly lower than that amount.

Thanks

Adam

As I understand it (not my area of specialism either) recovery of an overpayment is only paused during the bankruptcy period as I understand it - so recovery will start again once the bankruptcy is discharged.

Bearing that in mind and if there’s a realistic prospect of an appeal reducing the recoverable amount - she should appeal (and the time-limit for doing so isn’t “paused” if she goes bankrupt - so getting the appeal made in time would be the priority).

A debt which is the result of fraud cannot be ‘proven’ in bankruptcy meaning that the liability isn’t extinguished. An overpayment can be, but is not necessarily, fraudulent - it depends on the circumstances. The DWP will flag overpayments that they consider to be fraudulent on their systems accordingly and your client can ask the DWP whether they have it flagged as fraud, but the DWP’s view wouldn’t necessarily be determinative. A quick cheat is to check the rate at which any ongoing deductions from benefit are being made, because if it has been flagged as fraud they will take deductions at a higher rate than normal (for UC 25% rather than 15% of the standard allowance).

DWP will suspend recovery of all overpayments during the period of bankruptcy but on discharge will write off overpayments relating to the period before the bankruptcy unless they are considered fraudulent - see e.g. https://www.gov.uk/government/publications/benefit-overpayment-recovery-staff-guide/benefit-overpayment-recovery-guide#chapter-6

If your client is seriously considering bankruptcy, then she ought to have a debt adviser who can advise as to which of her debts would be included and whether or not it is an appropriate option for her. It is probably sensible for her to wait until the conclusion of the appeal process before making any final decisions as it may be that reducing the debt could affect the advice on which debt solutions are appropriate (e.g. if a reduction in the debt brought her within the scope of a Debt Relief Order instead).

My interest is piqued, good question!

I note this question overlaps with debt advice, so may need to relocate/duplicate this thread in Other areas of social welfare law

Can a disputed debt be included in a bankruptcy?

I wouldn’t have thought so as each debt needs to be “proved” and amount agreed with creditor. Once your client has clarified whether the overpayment is fraud/non-fraud, they may want advice from their insolvency practitioner about:
- including a non-fraud overpayment in bankruptcy despite disputing the amount (would need to be advised about what happens if substantial income increase ends bankruptcy early and debts are reinstated/ creditor agrees to reduced figure)
- whether a fraud overpayment amount needs to be agreed before bankruptcy starts (and recovery stops) even though receovery will restart after bankruptcy ends

Regarding appeal rights, I don’t think that acknowledging liability for a bankruptcy order would affect the right to challenge the DWP’s decision. Insolvency is a distinct area of law and a decision to accept liability in that area does not automatically mean the DWP’s decision is correct. I would say it’s in the interests of justice to allow the challenge to proceed despite any bankruptcy order (but will be double checking that now!)

past caring - 12 April 2024 11:28 AM

As I understand it (not my area of specialism either) recovery of an overpayment is only paused during the bankruptcy period as I understand it - so recovery will start again once the bankruptcy is discharged.

Just to be clear, recovery would only resume if the debt was incurred through fraud. It’s not impossible for DWP to only “realise” that they consider a debt was incurred through fraud at the point when the Official Receiver asks if they object to a debt being included in bankruptcy. As Elliot says, the DWP’s view on fraudulent intent is not necessarily binding.

Assuming there is no fraud, then listing a debt with an uncertain value in a bankruptcy is not in itself necessarily a problem. The Statement of Affairs completed by the debtor has columns for “Amount the creditor says you owe them”, and “Amount you think you owe”. The Trustee in bankruptcy can just estimate the amount of a debt which is subject to contingencies.

However, any substantial dispute should ideally be resolved first. E.g., when HMRC issue bankruptcy proceedings, the right to pursue an appeal against the amount of tax owed will generally vest with the trustee in bankruptcy - see the OR’s guidance on rights of action.  If the debt is fully dealt with by the bankruptcy, then the appeal would probably be dismissed (for example). 

Whether the same would routinely happen with a tribunal appeal against an overpayment amount for a closed period, or how all this interacts with s187 of the Soc Sec Administration Act 1992, I’m not sure. I’d have thought an appellant would at least need the permission of the Trustee, but I’d suggest seeking advice on this point, in the event that the debtor is going bankrupt but is nevertheless keen on having an FTT appeal heard for some reason.

(edited to add some reasoning)