Thousands of consumers may not receive PPI cashRefunds may pay off IVA or bankruptcy debt instead
17 May 2011
As the banks admit defeat on Payment Protection Insurance (PPI) mis-selling claims, thousands of consumers could never see a penny of their refund.
If you're currently bankrupt or in an Individual Voluntary Arrangement (IVA), it's unlikely that you'll personally receive a full PPI refund in cash as at least some of the money will usually go automatically against your debts.
However, if there is an element of compensation paid alongside the PPI refund, you may be able to ask for that amount to be paid directly to you. In all cases, it's best to ask your lender how they intend to repay you. If they plan to offset the entire refund against your debt, ask them to justify their decision. If you can't reach agreement, you can, if necessary, take the matter to the Financial Ombudsman Service for a ruling.
If you're in an IVA
If the refund of PPI is from a bank or creditor to whom you still owe money, it's likely that they will offset the refund against the amount of debt outstanding with them. Any surplus may be returned to you but will be taken into account by the person administering your IVA, who will probably insist that the money is used to repay other creditors. It's still worth putting in a PPI claim though as the refund could reduce the damage to your credit score of being in an IVA.
The Insolvency Service
What is an income payments agreement (IPA)?
If you are bankrupt and have more income than you need to pay for your reasonable day-to-day living expenses, the official receiver will ask you to make payments under an IPA. If you do not agree, the official receiver will apply to court for an IPO.
An IPO is a court order, so if you don't keep up the payments, your trustee can ask for money to be taken directly from your wages, or take other legal action to recover the unpaid amounts.
If you've gone bankrupt
You have a duty to inform the Official Receiver (OR) of any lump sum received while you're bankrupt (including PPI refunds, bequests in someone's will and redundancy payments). The OR may decide to use this money to repay your creditors. This is particularly likely if you have an income payments agreement (IPA) or income payments order (IPO), and you may have to make extra payments even after you've been discharged from bankruptcy.
If you're in a debt management plan
If you receive a PPI refund, it's likely the lender will want to knock the refund off whatever you owe them. Any surplus will be returned to you.
As debts are not usually written off under a DMP, but rather are rescheduled, a PPI refund will help you in the long run by reducing any outstanding arrears and meaning you'll pay off your debt quicker. This could be of particular help to people with mortgages who are at risk of repossession.
Una Farrell of free debt advice charity Consumer Credit Counselling Service (CCCS) said: 'While any funds received as part of a claim would be claimed as part of the IVA or bankruptcy, someone on a debt management plan could probably keep it. CCCS would advise them to do full and final settlement where possible.'
It's not too late to put in a PPI claim
Which? debt expert Martyn Saville commented: 'Anyone who's currently in a debt solution such as an IVA should not bank on receiving a PPI refund in cash. However, it's still worth putting in a claim if you think you've been mis-sold. A PPI refund could get you out of debt quicker, reduce your arrears and help rebuild your credit record.
'Plus, it's far better that the PPI you've wrongly paid is knocked off the debt you owe, rather than lining the pockets of banks to whom you would otherwise still owe the money.
'Just don't use a claims management company or a commercial debt management company to put in your PPI mis-selling claim - you can do it yourself for free with our online PPI reclaim tool.'
Has mis-sold PPI has caused debt problems?
If you think that the money you've paid out for mis-sold PPI is to blame for your debt problems, write a formal complaint to your lender spelling out your circumstances and asking that they not only refund your mis-sold PPI, but also take into account any resultant expenses, inconvenience and stress.
Emma Bryn-Jones from debtors’ co-op, Zero-credit, commented: 'On the surface, it may seem entirely appropriate that PPI claims from debtors are used to repay debts. However, when a creditor who mis-sold PPI can simply offset the refund against a debt in which unnecessary PPI may have been a principal contributor to financial difficulties, these arrangements do not even begin to consider the creditors' duty of care for individual consumers.'
Which? borrowing and debt advice
If you're struggling to meet your mortgage repayments, it's vital to speak to your lender as soon as possible. For more information, read the Which? guide to avoiding repossession.
If you're struggling with debt, read the Which? How to deal with debt guide, which includes contact details for free debt advice organisations including CCCS, National Debtline, Payplan and Citizens Advice.
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