Lawyers and beneficiary advocates want an urgent review into the Ministry for Social Development's (MSD) debt recovery programme.
Yesterday the High Court ruled against the ministry, which had been attempting to recover more than $100,000 from a woman it claimed was overpaid because she took out a bank loan and used a credit card while on a benefit.
The court said the debt did not add to the woman's resources and could not be considered as income.
Child Poverty Action Group spokeswoman Susan St John said there was no way debt should ever have been considered a resource.
"People just don't believe it when you say loans are being treated as income," she said.
It was hard to know how many borrowers were affected by the lending restrictions, but Ms St John said every one of them suffered.
"There are those people who maybe have been denied access to a benefit because they've had a loan and they're not going to show up in any figures," she said.
"It's really like just opening up a can of worms."
Auckland Action Against Poverty spokesman Ricardo Mernendez said over the past few months he had met with many people who were also penalised by MSD for receiving loans.
"At least half a dozen - that's just people who come to our office in Onehunga there will be many across the country who are in similar situations," Mr Mernendez said.
Lawyer Catriona Maclennan said the problems went beyond just loans classed as income, with systemic issues around the ministry's pursuit of money from beneficiaries.
"I can think of one woman I've acted for who is now in her fifties and chronically ill and will never work again, and MSD is pursuing her for an alleged debt of over $100,000 and they've actually spent a further $100,000 pursuing her for 15 years," Ms Maclennan said.
"In that time they've recovered $2000 - they will never ever get any more money."
She said Social Development Minister Carmel Sepuloni should step in and immediately stop debt recovery cases that were before the courts.
"I think there needs to be far more training of MSD staff and I think we need, what the government's already talking about, which is a massive culture change to get back to the idea that the MSD is there to help vulnerable people."
She said there was a punitive attitude towards beneficiaries that had to change.
In a written statement, Ministry of Social Development spokesperson Simon MacPherson said the ministry would be studying the court's decision carefully and thoroughly and consider its response.
Ms Sepuloni said she would not be commenting until she received a report from ministry officials.