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Can a bank use my PPI compensation to pay off debt?

Can a bank use my PPI compensation to pay off debt?

Can a bank use my PPI compensation to pay off debt?

You can claim for PPI compensation against a bank you still owe money to. Whether or not you will be paid the cash you are awarded will depend on the status of your debt.

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The deadline for claiming for PPI was 29th August 2019. If you did not make your claims before that date you are no longer eligible. No new PPI claims can now be submitted.

Claiming for PPI against a debt you still owe

There is nothing to stop you claiming for PPI compensation against a debt you are still repaying. However if the claim is upheld before sending you the cash the bank will check the status of your account.

The money will be paid to you given non of your accounts are in arrears. The payment is normally in the form of a cheque. This money can then be paid into your account with the bank or anywhere else you choose.

You are free to decide what to do with the money you have received. It can be used for whatever you like and does not have to go towards paying off the debt you owe.

Can you claim for PPI against an account in arrears?

You can certainly claim for PPI compensation if your account is in arrears. The fact you are struggling to repay the debt has no bearing on whether you were mis sold PPI.

However you may not directly receive any compensation you are owed. This is because of the banking Set Off rule. It means that if your account is in arrears the bank can use the compensation they owe you to pay off their debt.

Your arrears do not have to be on the same account as the one you claim for PPI against. The Set Off Rule can be used to repay any account in your name with the same bank which is in arrears.

If your account is in arrears it is of course still well worth while making PPI claims. Any compensation paid will reduce the balance you owe meaning you will be debt free sooner.

Can you keep your PPI Compensation if you are in a DMP?

If you are in a Debt Management Plan (DMP) your creditors have agreed to accept reduced payments towards your debts. However despite this agreement your account is still in arrears.

In these circumstances you can make claims for PPI compensation. However the Set Off Rule is still likely to be used. As such any cash you are awarded will be used to pay off the debt you owe.

It has been argued that this practise is unfair. You may have other more important debts that you need to pay. However the bank can not be penalised for having agreed reduced payments with you.

A DMP can last for a long time. As such making PPI claims against the debts in the Plan can really help you. Any compensation paid will significantly reduce its duration.

What if you have already settled your debt?

You may have previously been struggling to pay a debt but have now paid it in full. In these circumstances any PPI compensation awarded will be yours to do with what you like.

However what if you settled with a lump sum payment? In these circumstances the bank may still argue they can use your compensation for Set Off. This is because the remainder of the debt still exists.

You may be able to fight this if you have a written acceptance of your settlement offer stating the remainder of the debt will be written off. In these circumstances there is no longer a debt to Set Off against.

Statute Barred Debt and PPI Compensation

If you have made no payment towards an outstanding debt for 6 years it may have become Statute Barred. This means the debt can no longer be legally enforced by the creditor.

You no longer have to pay this debt. As such you may think that if you claim for PPI against it any compensation awarded will be paid to you. This is not the case. It will be used to Set Off against the debt

Although you are no longer legally required to pay the outstanding balance it is not written off. The debt still exists. The creditor can therefore use any funds of yours they are holding such as PPI to Set Off against it.

It is unwise to claim for PPI against Statute Barred debt. Any funds awarded will be used to Set Off against the balance. The claim might also be an acknowledgement of the debt and mean it becomes enforceable again.

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    104 thoughts on “Can a bank use my PPI compensation to pay off debt?

    1. Ashley says:


      I took out 2 loans with MBNA in 2003 one for 14000 another for 3330. I made payments for around 17 months but then unfortunately stopped paying it as had huge trouble. can I still claim Ppi on the loans even thou I didn’t pay debt back?

      1. James Falla says:

        Hi Ashley

        The first thing I will say here is if you have not already claimed for PPI then you no longer have the option. The deadline for making new claims was 29th August 2019.

        If you have already made claims then it is likely that MBNA will use any compensation awarded to set off against the original debts you did not pay. As such I would not hold your hopes up about getting any money.

    2. Ashley Goodyer says:

      Thanks James.
      I got a nice amount from from Blackhorse loan but I agree with you on MBNA I don’t expect anything. In addition I had a credit card from feb 1998 plus a loan for 6000 which I did pay off so will mbna keep ppi from this even thou its a separate loan from my others?

      1. James Falla says:

        Hi Ashley

        If you submitted PPI claims against your MBNA credit card and the £6000 loan before 29th Aug 2019 they should be considered. However if you are awarded compensation MBNA can still hold this back and use the funds to offset against the other debt you did not pay them. It does not matter that these accounts are separate. The off set rule applies bank wide it is not account specific.

    3. craig dunn says:


      I currently am finalizing a claim with Natwest for PPI, they have come back and awarded £1500, I used a claims company to manage it all for me. during the process im 90% sure I read somewhere that despite me still having a debt with natwest which im paying and this PPI claim would reduce that the claims company would take their Fee directly from natwest on payout.

      This morning I received an invoice from them for their Fee. Is it normal practice to bill this directly to the customer or is there someway I can force them to take it from Natwest?

      1. James Falla says:

        Hi Craig

        If you have used a claims management company to make PPI claims on your behalf, they will normally bill you direct for their service. They will not be able to recover their money from the bank itself. As such on the face of it you will have to bay their bill whether you have received the compensation or not.

        If NatWest do retain your compensation to off set against other debt you owe them (which is normal for the RBS Group) you will be out of pocket I am afraid. If this happens the only suggestion I can make is you argue with the PPI company that they should have known this would happen and should therefore waive their fee. Sometimes this works if you threaten to escalate a complaint…..

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