Deductions from benefits cannot continue during a DRO moratorium or bankruptcy.
Summary
The Supreme Court held that deductions from ongoing benefit entitlement to recover social fund loans and benefit overpayments were a 'remedy in respect of the debt' under section 251G of the Insolvency Act 1986. Deductions must stop once a debt relief order (DRO) or bankruptcy is made.
At the time of this case social fund loans were not classed as excluded debts. Social fund loans became excluded debts as of 19 March 2012.
Background
The court considered two cases, those of Mrs Payne and Ms Cooper.
Mrs Payne
Mrs Payne obtained a social fund loan of £843 in September 2007. Mrs Payne’s DRO was approved in August 2009. Deductions from her income support began and continued through the DRO moratorium period, despite informing the Department for Work and Pensions (DWP).
Ms Cooper
The DWP assessed Ms Cooper as having been overpaid £1,195 in incapacity benefit in August 2009. Ms Cooper’s DRO was approved in January 2010, yet deductions continued from her benefits.
The appeal
Mrs Payne and Ms Cooper challenged the deductions by way of judicial review. Both the High Court and Court of Appeal held that deductions must stop.
The DWP appealed the decision. It argued that:
it was not enforcing a debt, it was adjusting entitlement
in previous case law relating to bankruptcy, judges had allowed these deductions during the bankruptcy period
The court's decision
The Supreme Court dismissed the appeal.
The court held that claimants are entitled to a benefit under statutory law. The power to deduct from that entitlement is separate and not an adjustment to entitlement.
The court held that making deductions is enforcing a debt. Deducting from benefits is a “remedy in respect of the debt” and is prohibited during a DRO moratorium under section 251G(2) of the Insolvency Act 1986.
Allowing deductions during the moratorium would undermine the statutory scheme and go against the purpose of providing individuals relief from their debts.
Comments
This decision confirmed that all recovery action for qualifying debts must stop once a DRO is made, including automatic deductions from benefits.
Advisers should ensure clients notify the DWP or HMRC promptly after a DRO is approved and challenge any continued deductions.