A disabled woman has been awarded £5,000 in an out-of-court settlement after being called a “lying bitch” by a welfare official in formal legal papers after challenging a decision to cut her disability benefits.

The claimant, who suffers from a degenerative condition affecting her heart and lungs, took legal action against the Department for Work and Pensions (DWP) in the summer after it accepted the slur had caused her “severe distress and hurt”.

The “lying bitch” phrase was discovered by her welfare rights adviser in the text of DWP papers submitted to her Personal Independence Payment (PIP) benefit appeal tribunal. The submission suggested her claim of restricted mobility was false.

She formally complained to the DWP, and after the Guardian reported the “lying bitch” comments in March, the DWP accepted it had breached its professional standards and offered her a “special consolatory payment for gross inconvenience” of £250. It also reversed its earlier decision to reduce her PIP payment.

The claimant, a mother from south London, subsequently sued the DWP under the Equality Act 2010, claiming direct discrimination and harassment. After initially refusing a £3,000 offer from the DWP, she accepted £5,000 plus legal costs and an apology.

“I just want to put it all to bed now. I didn’t get any answers from the DWP about why it happened or how it would prevent it happening again,” she told the Guardian. “I have done what I have done to prove a point.”

She felt the DWP had constantly mistreated her, belittled her and refused to accept medical evidence of her condition. The scheduled tribunal had been the third time in five years she had been forced to appeal to overturn incorrect decisions relating to her entitlement to PIP.

It is understood that a civil servant has been dismissed as a result of the incident, which the DWP regards as gross misconduct. Why the slur was inserted is not clear. The claimant’s welfare advisor, Derek Stainsby of Plumstead Community Law Centre, previously called it evidence of “a canteen culture of contempt” in the DWP.

Stainsby had brought the comments to light with the agreement of the claimant after discovering them buried in DWP court papers. They were inserted into a passage which implied that because she was a full-time carer, her claims of restricted mobility must be contrived.

The DWP official had written: “In this lying bitches [sic] case she is receiving the mid-rate carers [sic] allowance component for providing day time supervision to another disabled person. The tribunal may wish to explore this further.”

The DWP declined to comment on the out-of-court settlement, although it had previously written to the claimant apologising for the failure of its customer service standards and the “severe distress and hurt caused to you by the unprofessional comments made in the appeal submission”.

Robyn Taylor, a solicitor for Deighton Pierce Glynn, who represented the claimant in the legal action, said: “Although the facts of the case are unusual, it does highlight a general issue that disabled people are experiencing a hostile environment in the benefits system.”

Daphne Hall, the vice-chair for the National Association of Welfare Rights Advisors, said: “Nothing will take away the distress caused to the claimant in this case but we are pleased that the DWP has acknowledged this and agreed to compensate her.”

It is understood that the £5,000 settlement will be treated as a personal injury payment rather than capital or savings, meaning that the claimant will not have it deducted from future benefit payments. The DWP has a £6,000 savings threshold, above which recipients of some benefits would see their benefit income clawed back at the rate of £1 a week for every £250.

• This article was amended on 17 December 2019 to clarify that not all benefit recipients will see their payments reduced if they have savings of more than £6,000.