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

Bank held back PPI CompensationYou 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.

  • Claiming for PPI against a debt you still owe
  • Can you claim for PPI against an account in arrears?
  • Can you keep the compensation if you are in a DMP?
  • What if the debt is already settled or Statute Barred?

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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 in a DMP but now your debt has been paid in full. In these circumstances any PPI compensation awarded will be yours to do with what you like.

However what if you settled your Plan early 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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25 thoughts on “Can a bank use my PPI compensation to pay off debt?

  1. Paul says:

    Apologies if this is a stupid question. If the lender has agreed a settlement figure, and this has been paid, can they still apply the set-off rule. I ask because Nationwide have previously agreed settlement and taken payment for my partners debt. Now, after being judged at fault for PPI misselling they want to off-set. I had an IVA then won a PPI claim against HSBC. They did not try to apply this rule. I hope someone can answer this for me.

    1. Hi Paul

      This is actually a very interesting question. If the creditor has agreed to accept a payment in full and final settlement of the debt they are owed then I would argue they cannot then hold back PPI for further set-off. At the end of the day how can you set-off against a debt which by their own admission no longer exists. I would suggest you have a strong case to argue here. If you feel you would like any help with it please do get in touch.

  2. KemZ says:

    My loan is 10 years old I got awarded ppi and they used it to pay off my loan I was on default and they hadn’t asked for a payment I had so many other debts to worry about I thought the debt had been over 6 years old and the company folded that they couldn’t do that is it worth challenging?
    Any advise please I’m still in bad debt and the2k can pay off priorities

    1. Hi KemZ

      If I understand you correctly you believed that this loan was statute barred because you had not made payments towards it for more than 6 years. If this is the case then the debt is statute barred as long as no CCJ has been issued against you in the mean time. As such legal action cannot be taken to enforce it. However this does not mean that the balance has been written off. The debt itself still exists. It is just that it is not enforceable. Given this if you claimed for PPI then the loan company are within their rights to keep any compensation they owe you and off set it against the balance.

      If you are still struggling with your debts please do give me a call (use the 0800 number at the top of the page). I would be happy to give you more advice about the best way to manage the problem.

  3. Don Wilson says:

    My query is this….for example ……. if a person has been paid £3500 compensation on a Balance of £5800 and in the ‘settlement letter’ the Bank states that your Balance WITHOUT PPI would have been £2500 – they pay the Compensation of £3500 BUT your NEW Balance £5800 !!

    The Bank’s argument is that IF they reduced your balance AFTER paying you Compensation then THEY would be paying YOU Compensation TWICE!!! …… So….. your new ‘repayments’ on the Loan is basically paying back the Compensation that THEY paid to you! How can this be putting you back in ‘the position’ you were if PPI was not (illegally) added to your original loan. I paid 47 payments off a loan of £6000 at £132.00 per month (£6204) and after receiving £3700 ‘compensation……….. my balance was almost £5000 !!

    1. Hi Don

      This does seem strange. All I can suggest is you request the bank to issue you a statement showing exactly what the original loan was and the interest charge on the loan itself. Then it stands to reason that the outstanding balance should be this total less the payments you have paid less the PPI refund now received. If it is not then you do deserve an explanation from the bank.

  4. Scot Pound says:

    I have recently been awarded thousands by my creditor but I still need to sign that I accepted the offer and I’m a little hesitant, I defaulted payments in 2003 when I suffered a serious head injury and when I contacted my creditor they failed to even advise me of any PPI I had in place, instead I was left worried and depressed about debt while going through a medical recovery. 13 years later I’m worried that they will just use that money to pay off my debt and as they failed to provide insurance cover when I needed it, I disagree with that. Do I have any grounds for appeal if they do this?

    1. Hi Scot

      In terms of the set off rule I believe the bank can still hold back any money they now award you for PPI and use this to pay off the balance you still owe them. The debt itself is probably already statute barred. However even after this happens it is not written off. Although legal action cannot be taken against you to collect the debt still exists. As such in theory the bank can retain any compensation they now owe you and use it to set off against this old debt. As to the question about whether you can appeal against the bank if they do this unfortunately I cannot advise you. You would need to speak to your local CAB or a solicitor to get an answer on that.

  5. Sammi says:

    Hi , random question like others if I have debts with banks store cards and black horse I was in a payment agreements till I lost my job and just stopped paying I still have the car black horse have never written or chased me however if I’m not wrong I think a few of my cards and Lloyds loan and possibly black horse loan have been sold to agencies I have received several letters referring to money owed now payable to these agencies. If I claimed ppi would I receive the funds given that these original lenders have been paid when the debts were sold and it’s up to these other companies to now chase me ?

    Also is it possible to claim gap insurance bsvk and how far can I claim I was 18 cocky and stubborn strolled into a showroom n bought a car for just over 8grans I had no recorded job at the time I was cash in hand and a student yetvlssed checks to get the car no deposit was required I just wanted the keys the small print didn’t matter it was with black horse I paid extortionate extras like gap and all sorts and the total amount I was to repay was nearly 15,000 however this was all in 2007 wondered what weight it would hold on Amy claims

    1. Hi Sammi

      If your debts have been sold to debt purchasers then yes you can make PPI claims against the original loan companies and yes they should pay you any money you are owed. Given they have sold on the debt they are no longer allowed to use money they owe you to offset against their original debt as they no longer have any debt to collect against. As such if they owe you PPI compensation they should pay it to you. I would go ahead and make your claims.

      In answer to your question about gap insurance I am not sure about this. You may be able to claim against the car finance company for mis selling but you would probably need to take specialist advice. I suggest you speak to a company called Claims Guide about this.

  6. Cheri says:

    My husband and I had a loan around 10 years ago which we fell in to arrears with as he was made redundant. It was passed to a debt management company with the interest and total cost of PPI for the full term of the loan lumped on top. I successfully pursued a PPI claim with the original lender who sent a cheque to the DM company to reduce the balance. This was just for the PPI payments we had made. We are now in conversations with the debt management company to settle the balance. Our question to them (that they seem to be struggling to answer) is why are we expected to pay the balance of the loan PLUS the cost of the PPI policy when the original loan company have already admitted was wrongly sold to us? We have asked them to remove this cost before we agree to settle the balance. Are we in the right?

    1. Hi Cheri

      I would agree. PPI compensation is paid in order to put you back in the same position financially as if you had never paid for the insurance in the first place. As such the bank should now have deducted from your current balance any amount added to the original loan because of the PPI. If you believe this has not happened you need to contact the bank directly and ask them to send you a new recalculated balance. Your DM company should then use this revised balance as the basis for a settlement.

  7. Rita says:

    Hi, think2claim applied on our behalf for ppi with bank of scotland. My husband asked if we coud get cheque, they confirmed yes and it would be sent to us. On three seperate occasions my husband was advised cheque was in post and confirmed it was sent second class and my husband asked them to confirm the address it was sent to and they confirmed our address. After nearly Two wweks they then confirmed it had been offset against outstanding debt. My husband has just started new job and we are financially struggling, surely the bank can’t give you false information like this. They confirm all calls are recorded. So they will have recorded calls confirming cheques sent.

    1. Hi Rita

      The bank are within their rights to use your PPI compensation to set off against the debt you owe them. The way they have communicated with you is clearly unprofessional. However unfortunately I do not think there is very much you can do about it. I understand you are struggling but at least your overall debt with BoS has gone down. I think you should speak to think2claim who really should have warned you about the right of set off.

  8. Mick Turnbull says:

    Nothing has been mentioned here about a DRO. The rules for a DRO are completely different to all other forms of insolvency and PPI cannot be used to offset the debt after a DRO has finished,but the FOS will try to tell you different. They are wrong,for the simple reason that a DRO debt is non existent after the one year it is operating for. It is not statute barred,but completely gone and it is for this reason that it cannot be recovered.If any company attempts to recover the cancelled debt,then they are actually breaking the law. So if you have a DRO do not ask for or accept unsolicited offers of PPI,as it is probably a scam to get your DRO cancelled.

    1. Hi there Mick

      You raise an important point about the DRO solution (Debt Relief Order). You are right when you point out that after discharge from a DRO the creditors can no longer chase the individual for the debts owed. The debts are discharged and can no longer be collected. However this does not mean that PPI compensation claimed after a DRO will be paid to the individual.

      In fact the rules in this situation are the same as bankruptcy. Any compensation paid as a result of PPI which was mis sold prior to the start date of the DRO is considered an after aquired asset of the DRO (in the same was as it would be had the individual gone bankrupt). As such it must be paid directly to the Official Receiver even after the DRO is finished and discharged. As such there is really no benefit in claiming for PPI after a DRO.

      To make matters increasingly complicated if such a claim was made and any compensation due turned out to be more than £1000 there is then a question as to whether this would invalidate the whole DRO. As far as I am aware there has never been a court case which has considered this question and so currently it remains unanswered. However given this uncertainty my advice is simply do not claim for PPI after you have been discharged from a DRO.

  9. Tina says:

    I have applied for ppi n been told I have a claim! I am with a dmp but think my debt was sold on so do I still get the payment? I’m going through a agency so will they take a payment out first before it comes to me or to dmp? How long does my claim take to sort out?

    1. Hi there Tina,

      As far as I am aware the bank cannot withhold PPI compensation to set off against a debt which has been sold. This is because they are no longer owed the money. The debt purchasor is the new legal owner. Given this the bank has nothing to set off against and should pay out the money awarded. In terms of how long it will take the bank to review the claim and pay out this will vary. It is normally between 2-3 months from the point a claim is submitted but could be quicker.

  10. Tina says:

    Thankyou for your help!

  11. Jo says:

    Hi…I have recently made a claim for PPI through The Claims Guys. The complaint was upheld and I have been awarded £4500. However, I have been informed that the money will be offset towards the debt with the bank. I feel this is fair so have no argument with that but have just received a letter from the Claims Guys asking for immediate paymemt of their fee of £1650 which I do not have.
    I was unaware that the bank would use the money to offset the debt, or of the extent of the fees involved. I cannot pay the fee as I cannot afford it. Can The Claims Guys get their fee from the offset money from the bank? Feedback would be much appreciated, thank you

    1. Hi Jo

      I assume you have debt outstanding with the bank which is in arrears? If so then it is quite legitimate for the bank to withhold the compensation due and use it to off set against the debt. I would check the terms and conditions of the contract you signed with the Claims Guys to see what it says in this situation. However I certainly feel you should speak to them and say that this scenario was not properly explained to you when you signed up with them. On this basis you should demand that they cancel their fee. If they refuse your only option is to raise a complaint against them I am afraid.

  12. Craig says:

    I’m in dmp my debts have been sold on to other companies I have claimed ppi if I receive anything can I use this to pay of debts or do I have to give the companies my compensation?

    1. Hi Craig

      Your question is very similar to that of Tina’s (above). You will need to make your claims against the original banks who sold you the PPI. They should pay you any compensartion due. They cannot withhold it claiming the reason is set off because they no longer have a debt with you to set off against. The companies that bought the debt have no legal claim on any windfall you receive. As such you can decide to do whatever you want with any money you receive. Of course given you are in a DMP a good idea might be to use it to settle the outstanding amounts you owe.

  13. Patricia says:

    I had a credit card with Lloyds I went into default and since taken to court for repayments CCJ which I’ve been paying off monthly .
    I recently claimed PPI back on that account and the claim was successful, do I still have to pay the CCJ for this account or can I appeal it after the fact seeing as Lloyds misspelling was the reason I defaulted on the account and accrued the debt ?
    Do I need to contact Lloyds and ask them to withdraw the claim or go I have to go through the courts ?

    1. Hi Patricia

      This is an interesting question. I think you have a strong claim that the CCJ should never have been issued. It stands to reason that you would not have been struggling with the debt had you not been mis sold the PPI in the first place. We are not solicitors here so I cannot be certain what the outcome will be. However I do not think there is any harm in you writing to Lloyds and asking them to withdraw the CCJ. You should state that the purpose of them paying you PPI compensation was to put you back in the position you would have been in had you never been sold the PPI. Clearly overturning the CCJ must be part of that. Let us know how you get on.

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