The Government is cancelling up to $3.2 million of debt racked up by hundreds of people who were wrongfully kicked out of their Housing NZ homes over a flawed methamphetamine test.

But the debt write-off won't cover social welfare payments for medical or dental costs, nor is compensation being offered for any private debt that followed the evictions.

Last year Housing NZ apologised after admitting to using a methamphetamine test that had little merit and led to about 800 tenancies being shut down. The test was 10 times lower than what it should have been, and based on guidelines not meant for anything but former labs.

It followed a report from then-Chief Science Advisor Peter Gluckman to the Prime Minister that said that not a single person had been found to have gotten sick from the residue left over when someone smoked P.

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Many of those that Housing NZ evicted then built up debt after Ministry of Social Development (MSD) payments for issues including emergency housing, moving costs, storage, replacement furniture - they had to abandon belongings in the mistaken belief that they were contaminated - and bond money for a new tenancy.

Social Development Minister Carmel Sepuloni announced today that MSD would write off any debt that was directly related to the wrongful evictions.

"MSD granted the support but people were required to pay back the money and some fell into significant debt. The debt is a burden for many and has caused distress for those who lost their homes through no fault of their own," Sepuloni said in a statement.

"The Government has instructed MSD to write off debts for the support people needed as a direct result of these policies ending their Housing NZ tenancy."

She said MSD would also refund any money people have already paid back. MSD hoped to have those payments completed by mid-year, and Cabinet has agreed that these would not lead to a reduction in any benefit payments for 12 months.

A dedicated MSD team has identified about 900 people who went to MSD for support after being wrongfully evicted. They had racked up debts totalling $3.2 million.

Not all of the debt will be directly attributable to the wrongful eviction, and the team would now go through the details to determine what qualified. Debt for dental or medical costs, for example, are not expected to be written off, a spokeswoman for Sepuloni said.

Auckland Action Against Poverty welcomed the debt write-off, but called on the Government to take a "generous and compassionate" approach to what should qualify.

"Additionally, the Government should look at compensation for the private debt incurred as a result of these wrongful evictions," AAAP poverty co-ordinator Ricardo Menendez March said.

"While affected tenants would have had to look for assistance from MSD, many who were unable to access adequate support would have needed to take on additional credit-card debt, bank loans or fallen prey to shark loans."

But a spokeswoman for Sepuloni said there were no plans to compensate for private debts.

Meanwhile compensation payouts from Housing NZ to affected tenants has reached $3.4 million - an average of $7863 paid out in 431 cases; 107 cases had been deemed ineligible, for example for evictions that were not meth-related or a tenancy that ended for other reasons.