The truth about bankruptcy
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You will need to include tax credits and any other government benefits you receive when you are working out how much you can afford to pay towards a debt management plan. However, your eligibility for these benefits will not be affected.
If you’ve found that a Debt Management Plan (DMP) is the best course of action for you, but you’re currently on tax credits, you might be wondering whether they will be affected.
First of all, the good news is that being on benefits won’t stop you from starting a Debt Management Plan, and shouldn’t cause any problems with a DMP if you have one already. As long as you can prove that you have a reliable source of income, and can afford the payments into the DMP, then the fact that your income, or part of it, comes from benefits should not be a problem.
A DMP is an informal debt solution that gives you the opportunity to pay your unsecured debts off at an affordable rate. Quite often the lenders will agree to freeze interest and charges as well. Even though your payments would be lowered, you would continue to pay something until the debt was completely cleared which is why having a reliable income is so important.
So if a DMP is right for you, there’s no reason why these two things wouldn’t be compatible.
If you’re not sure where you stand with your finances or whether you need to be looking into a debt solution, then we’re here to help. Use our Money Smart report to check your financial health and use the options to the left to speak to one of our experienced debt advisors.
Benefits and DMPs
When you speak to a debt advisor about whether a DMP, or another debt solution, is suitable for you one of the first things they will do is take you through your income and expenditure in detail.
From this information your advisor will be able to put together a realistic payment plan for you, so that you’re able to pay your debts back at an affordable rate.
If you are on benefits, then they’ll be taken into account as part of your income. (If you were receiving benefits relating to a medical condition, like DLA, any expenses you have connected to your condition would be taken into account when you go through your income and expenditure.) Your benefits, plus any other income, could provide you with enough money to be able to pay something towards your debts each month, just not all that was originally agreed. If this is the case a DMP might be the way to go.
Another solution might be better if your tax credits don’t leave you with much spare cash. For example, if you had less than £50 in disposable income (this is what you’ve got left after all your bills have been paid), you also had assets worth less than £1000, a car worth £1000 or less and you owed less than £20,000, a Debt Relief Order could be better for you. Other solutions are available to Scottish residents, for more information on this have a look at our Scottish page.
DMPs and DROs are only two debt solutions on offer, there are others, all with their pros and cons. For instance, if you became bankrupt and your income was made up solely of state benefits then you wouldn’t be expected to pay anything into the bankruptcy. Have a look at our page to familiarise yourself with the differences between the solutions and, if you like, give one of our advisors a call, they’ll be able to look at your situation in depth and recommend the best solution.
Will the changes to the benefits system affect my DMP?
In 2015 the Government proposed some changes to the benefits system, such as merging different benefits together into Universal Credit, lowering the amount you’re allowed to earn before your tax credit reduces and also limiting it to two children per household. They were originally going to go ahead with these plans in April 2016, but as you may have seen in the news, they have been opposed and now instead of changing the system slowly, it will changed all in one go in 2018.
If you have a DMP that is set to run into 2018, and you’re on tax credits, then the good news is you have plenty of time to prepare for any changes that may be coming your way. Closer to the time, and when you know how it’s actually going to affect you, you would need to get in touch with your DMP provider and make them aware of any change in circumstances. If the change in tax credits meant that you’d see a drop in income, your provider would review your income and expenditure and may propose lowering your payments if necessary.
Click here to read more about DMPs in depth and don’t forget that the best way to know how to deal with your debt is to seek free advice from one of our advisors.
by Christine WalshBack to blog home