Ofgem Report Could Help People Manage Their Debts
January 28th, 2009 | 
Author: Struggling to manage their debts as the cost of living rises, many people in lower-income groups are also struggling to cope with another disadvantage – they’re being charged more for their energy.
So says a report from energy industry regulator Ofgem, which has ‘given the industry notice to end practices that are failing some customers, and to deliver the full benefits of competition to the entire market’. Specifically, the report points out that people on pre-payment meters (many of whom already have a hard time managing their debt repayments) are being charged more than people who pay for their energy in other ways.
About 12 percent of households, Ofgem reports, pay for at least one fuel by pre-payment meter, but that number jumps to 37 percent for people in social housing. “The lower a household’s income, the higher (in general) their risk of fuel poverty – of having to spend more than 10 percent of their income on fuel,” said a spokesperson for debt management company Gregory Pennington.
“So it’s particularly worrying to see that people on pre-payment meters seem to be getting an even worse deal than before. At the start of 2005, according to the Ofgem report, the ‘average differential between pre-payment meter (PPM) and direct debit (DD) of the six major suppliers’ was around £80. At the start of 2008, however, that had risen to £125.”
“For many of those people, meeting that extra cost is a huge challenge. Today’s economic climate means many people are finding it increasingly difficult to cope – not just because their bills keep rising, but also because their income is looking less secure. Many borrowers, in particular, are already struggling with their debt repayments, and are worried about how they’d manage their debts if their income were to drop.”
There are, however, ways in which borrowers can ‘stretch’ their monthly budget. Depending on their circumstances, borrowers may be able to choose from a range of different debt solutions, any of which may be able to reduce the amount they’re paying towards their unsecured debts each month.
A debt consolidation loan, for example, could let them pay off their existing unsecured debts all in one go, by replacing them with a single larger loan which they could actually afford to pay back – basically, because they can arrange to pay it back more slowly than they had agreed with their original creditors. Repaying a loan more slowly will, of course, postpone the day they’ll be debt free (and potentially cost more in interest), but it can make an immediate difference to a borrower’s finances, allowing them to avoid missing payments – and the charges and damage to their credit report that that can entail.
Then there’s debt management: asking debt management professionals to talk to their creditors on their behalf, asking them to agree to lower monthly payments and other concessions that could help borrower and lenders alike, by ensuring they can actually keep up with their repayments. (Some people choose to negotiate themselves, but many prefer to ask debt management professionals to do it for them.)
Finally, there’s insolvency. Some individuals with no realistic chance of paying off their unsecured debts in a reasonable period of time may need to look into bankruptcy. Others, however, may be able to make payments towards their debts for a number of years – and in this case, they may be better off pursuing a different kind of insolvency, such as an IVA (Individual Voluntary Arrangement) or Trust Deed.
IVAs require a five-year commitment, whereas Trust Deeds (available to residents of Scotland only) require a three-year commitment. In either case, if the IVA / Trust Deed is accepted, the borrower will agree to make regular monthly payments for its duration, and the creditors will agree to freeze interest, hold off on any (further) legal action and write off any outstanding debt once the IVA / Trust has been successfully completed.
Debt management, debt consolidation, IVAs, Trust Deeds. Each of these debt solutions is appropriate for people with different kinds of debt, but they all have the potential to help people cope with times of economic hardship – and so could the fairer system of charging which Ofgem wants to see.
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