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Tax Credit Overpayments and Bankruptcy

Paula5th January 2011

Dealing with tax credit overpayments in bankruptcy is not as black and white as it may first appear. This article provides you with an insight to how tax credit overpayments are dealt with in bankruptcy.

Please be aware that bankruptcy law relies on case law and HMRC policy can change so it is extremely important that you seek professional advice on how to deal with your debts before you go bankrupt. This article is not a statement of the law.

If you are considering bankruptcy to deal with your debts then you will obviously want any tax credit overpayments included. The good news is that they can be provided that the decision to recover the overpayment is issued to you prior to the date of the bankruptcy order. If it is issued after the date of the bankruptcy order then unfortunately the overpayment is not classed as a bankruptcy debt and remains payable. Further to this any overpayment due to fraud on your part cannot be included in the bankruptcy and will remain payable. The timing of your bankruptcy petition may therefore be important.

HMRC can recover the overpayment

  • from any award of tax credits payable to the person upon whom a notice of overpayment has been served
  • by direct collection where there is no ongoing award of tax credits or where the ongoing award has ceased

Where, at the date of the bankruptcy order, it is the intention of HMRC to recover the overpayment from ongoing awards then HMRC will continue to do so up until the date of your discharge from bankruptcy. This will usually happen on the first anniversary of your bankruptcy or sooner if you are given early discharge. If it was intended to be taken by direct collection then the overpayment will be dealt with in the bankruptcy and you will not be expected to pay anything.

Where tax credits have been claimed jointly, HMRC will pursue any non bankrupt claimant. This is because the debt is considered joint and several.

As you can read, it is possible for a tax credit overpayment debt to remain payable after your bankruptcy. For this reason it is important that you seek advice prior to going bankrupt. For further information on how to seek advice with bankruptcy please visit the bankruptcy advice section of my website.

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