Benefits and Debt Guide

Benefits are a crucial financial resource, but can be impacted by unpaid debts. While benefits provide essential support, it’s important to manage spending wisely and seek advice to avoid accumulating debt.


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Being in debt can be stressful enough without the added pressure of relying on benefits. However, for the thousands of people in the UK navigating life on a low income and on benefits, debt has become a part of normal daily life.

It's important to ensure you're getting all the financial help you're entitled to - especially if you're struggling with debt - but with certain debt solutions unsuitable for people on benefits, it's crucial you know what you're eligible for.

Whether you're claiming benefits to help with your debt or you're drowning in debt as a result of benefits overpayments, there's always help available. This guide will cover everything you need to know about benefits and debt.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a formal debt solution where you make monthly payments to the people you owe money to (your creditors) over a set period. It usually takes five years to complete an IVA but it can take six years if you miss payments.

Because an IVA is a legally binding agreement, you must contact an Insolvency Practitioner (IP) to set up and manage it for you. Insolvency Practitioners will also deal with your creditors on your behalf and ensure your monthly payments are distributed evenly and fairly among them.

During an IVA, all interest and charges on the debt will be frozen and your creditors won't be able to contact you or ask for payment. Once your IVA term ends, any remaining debt will be written off (cancelled).

If your circumstances change (e.g. you get a new job or receive a windfall payment) while you're partway through an IVA and you can no longer afford your current monthly payments, you must inform your Insolvency Practitioner immediately. This can affect your IVA eligibility and your monthly payments may change.

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What is Universal Credit?

Universal Credit (UC) is the most common type of benefit available in the UK. It can be applied for online and is designed to help individuals who are on a low income and are struggling to afford essential costs like food, clothing, and utilities.

Once you've been approved for UC, your first payment will be made up of a fixed standard allowance as well as any additional payments that you may be eligible for (e.g. if you have children, are disabled, or need extra help with housing costs).

UC is replacing a number of legacy benefits, including Child Tax Credit, Working Tax Credit, Income Support, and Housing Benefit, with the migration expected to be complete at the end of the 2023/2024 financial year.

How does debt affect your benefit payments?

For some individuals, benefits are the only thing stopping them from experiencing serious financial hardship and falling into debt - especially if they have endured a job loss, relationship breakdown, or long-term illness or disability.

However, if the debt level is extreme or legal action has already begun, benefits can do little to improve the situation. Most benefits are also means-tested, which means you'll only qualify if you meet certain criteria and your payments can be capped at a certain amount.

The impact of debt on your benefits payments also depends on the type of debt you have and who you owe. For example, if you have unsecured debts, such as personal loans, credit cards, and overdrafts, your benefits will usually remain unaffected and the amount you receive won't change.

However, if you owe money to HM Revenue & Customs (HMRC) or the Department for Work and Pensions (DWP), they may deduct money from your benefits before you receive it to help them recover the debt. This can range from 15% to 40% depending on how the debt was accrued.

How do I know which benefits I'm entitled to?

If you're struggling with debt and your income doesn't come close to covering your repayments, it's important to ensure you're receiving the maximum financial support you're entitled to. Some benefits can even be claimed if you have a full-time job, savings, and investments.

There are several ways to check your benefits entitlement, including:

Use a benefits calculator

Using a free benefits calculator, such as the one available on the GOV.UK website, can help you check which benefits you're entitled to.

They will usually ask questions about your income, expenses, and personal circumstances to get an accurate picture of your financial position and determine if you qualify for benefits you're not currently receiving.

Do your research

The internet can be a great place to find expert help and advice on the different types of benefits and their relevant eligibility criteria.

By doing your research, you might discover that you've been missing out on extra financial support that can help you cover your essential costs and, more importantly, repay your debts.

How can I better manage my debt when I'm on benefits?

Being in debt can be exhausting and it's normal to worry about how you're going to afford your next repayment alongside your other essential costs. But for those in debt and on benefits, something as simple as getting through the day can feel like a financial juggling act.

The good news is, no matter how helpless the situation seems, there are steps you can take to better manage your debt while you're on benefits.

For example, if you've applied for benefits but won't receive your first payment for a few weeks, you may be able to get an advance, which is a loan that you'll be required to pay back out of your future benefits payments. If this means you'll miss a debt payment, you must let your creditor know as soon as possible.

It's also worth taking the time to explore the various debt solutions that may be able to help you repay your debts while you're on benefits. Some of the debt solutions that are suitable for people on benefits include IVAs, DROs, and DMPs.

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Which debt solutions are available to me?

If you're struggling with debt, it's important you know what your options are. Remember, whether it's a debt solution or readjusting your budget, there is always help available.

Here is a quick guide to the different debt solutions that you may be eligible for:

Debt Management Plan (DMP)

A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay your debt at a rate that you can comfortably afford.

DMPs are managed by a DMP provider and work by consolidating your debt into a single monthly payment, which is then evenly split and divided among your creditors.

However, because DMPs are not legally binding, you won't be protected from your creditors and will be free to leave the agreement at any time if it no longer suits you.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to repay your debt through a series of monthly payments based on affordability.

Unlike DMPs, IVAs are legally binding, which means you'll be protected from your legal action and both you and your creditors will be expected to stick to the terms of the arrangement.

Generally, as long as you can put a reasonable amount of money towards your debt each month and the creditors to which you owe 75% of your debt agree to the IVA, it should be approved.

Debt Relief Order (DRO)

A Debt Relief Order (DRO) is a formal debt solution that allows you to deal with your unaffordable debt. It's often considered a simpler and cheaper alternative to bankruptcy.

During a DRO, your debts will be frozen for a set time (usually 12 months) and, as long as your situation doesn't change in this time, they will be written off at the end of your arrangement.

If you owe less than £30,000 and have savings and assets worth less than £2,000, a debt adviser may consider you a suitable candidate for a DRO.

What should I do if I'm in debt due to a benefits overpayment?

Most benefits payments are calculated based on information you supply to the DWP when you apply (e.g. your name, address, monthly income).

However, it's not uncommon for mistakes to occur - whether due to computer or human error - and this can lead to you receiving more benefits than you're entitled to and, as a result, owing the DWP.

This might sound like a simple fix but the DWP can be persistent in asking for repayment of the debt. They are unlikely to stop contacting you until the full overpayment has been recovered and may even deduct the extra money from your wages or future benefits payments through something called a Direct Earnings Attachment (DEA).

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Where can I get help if I'm on benefits but still struggling financially?

Benefits can be a lifeline for people who are on a low income but for others, it simply isn't enough to make a dent in their outstanding debts.

However, if you're claiming the maximum benefits you're entitled to but are still struggling, there is extra help available. We've outlined your options below:

Talk to your creditors

If you're dealing with debt, talking to your creditors is key to keeping them in the loop and protecting yourself from further legal action.

This can be daunting and it's normal to want to avoid all calls and letters about the debt, but burying your head in the sand will only make the situation worse.

Even if your benefits don't come close to covering your balance, keeping your creditors aware of your financial situation can reassure them that you're doing all you can to deal with the debt. They may even grant you a temporary break from your usual monthly contributions until you get back on your feet.

Seek free debt advice

Dealing with debt can be a challenging and isolating experience, but there is always help available and you don't have to face it alone.

There are various charities, financial advisors, and debt management companies available to provide tailored advice on how best to deal with debt while you're on benefits.

Whether an independent financial adviser recommends a debt solution or just helps you create a budget, talking about your debt can make it feel like the weight of the world has been lifted from your shoulders.

Check your benefits entitlement

The first thing you should do if you're on benefits but are still struggling financially is to check your benefits entitlement - especially if you have debts to pay.

Thousands of people miss out on financial support they're entitled to because they're not aware that they're eligible for extra benefits.

The DWP won't inform you if you're missing out on extra benefits, so it's important to check your benefits entitlement regularly or every time your situation changes.

Enter a debt solution

Entering into a debt solution can help you better manage your debt when you're on benefits.

Some debt solutions, like an IVA, will even write off your remaining debts when your arrangement comes to an end, meaning you don't have to pay them.

However, it's important to note that certain debt solutions, such as a Protected Trust Deed (PTD), aren't an option if benefits are your only income source.


If you're dealing with debt and rely on benefits as your only income source, it can be difficult to chip away at your balance as quickly and effectively as you'd like. Similarly, if you've received a benefits overpayment, it's normal to worry about how you're going to afford the repayments.

By familiarising yourself with how debt affects benefits and vice versa, you can be well-equipped to make a decision to deal with your debt. Simply checking that you're receiving the maximum support you're entitled to can also ensure you're doing all you can to improve your financial situation.

Remember, debt can be isolating but you don't have to deal with it alone. There are various debt advisers, charities, and organisations available to provide free, impartial advice tailored to your unique circumstances.


Key Takeaways

  • Benefits are designed to provide some much-needed financial help to people who are unemployed or on a low income
  • Individual Voluntary Arrangements (IVAs) are a formal insolvency solution where you repay your debt over a series of fixed monthly payments
  • To find out which benefits you're entitled to, use a benefits calculator and do your research
  • When you're on benefits, you may still be able to enter a debt solution to help you repay your debt
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