No, banks are not allowed to use housing benefit or any other benefit to repay an overdraft. You can protect your housing benefit payments by telling your bank it should only be used to pay your rent. This protection is called a 'first right of appropriation of funds order'.
An overpayment is any amount of Housing Benefit which has been paid to you but which you are not entitled to. This could have happened because you did not inform the Council of a change in your circumstances.
Capital is anything that has a monetary value, such as land and property, investments and savings. You need to let us know if you, or your partner, have a change in the amount of savings or capital you have.