How a tax refund can scupper a Debt Relief Order

Posted in 'Dealing with Debt' by Barry Stamp

23 January 2012

One of the disadvantages of Debt Relief Orders – a form of ‘bankruptcy lite’ which is growing fast in popularity as we have recently reported – is that it is subject to very stringent rules on the total amount of assets you have, and on the total income you receive.

Typically when a person loses a job and finds that their financial fortunes are so bad that a Debt Relief Order is called for, they may find that they easily qualify at first, and may go through the process of getting a Debt Relief Order set up, agreed and established.

But because losing your job can often result in getting a PAYE tax refund from HM Revenue and Customs, and because that refund has to be reported under the scheme, it can sometimes happen that the tax refund is large enough to disqualify you from taking part in the Debt Relief Order.

The only options available then are to petition for your own bankruptcy – the cost of which is prohibitive and may well take up a large chunk of the tax rebate – or to wait for a creditor to do it for you, though they too will be reluctant to incur the costs of this when they know that there are few assets and little income to go on.

An Individual Voluntary Arrangement is another option, but this form of bankruptcy tends to take years to unwind and is like using a sledgehammer to crack a nut.

What a pity that those who planned Debt Relief Orders didn’t have the foresight to think about the practicalities of administering the system in greater detail, or can apply the common sense required to simply either ignore any tax refund or to allow the recipient to return it to HMRC.

If you are suffering from debt stress, you might like to take a look at our no-nonsense plain English Debt Advice Centre. No matter how serious your financial problems, this will point you in the right direction of where to get help from.