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Part 1: Debt-ceiling debate (or debacle) & consumer bankruptcy

Even without default, could U.S. credit downgrade fuel another financial meltdown?


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Throughout these states united distressed citizens wonder about the disunity on Capitol Hill in Washington, D.C. Indeed, observers around the world have commented on and tried to analyze the apparent lunacy.

No raising the debt ceiling for consumers


Bankruptcy attorney John Skiba opened a recent bankruptcy-related piece this way: "It is an interesting comparison to watch what is going on Washington with their attempts to raise the debt ceiling and comparing that to your own debt issues. The government has bills to pay, no money, and so it wants its credit line increased to be able to make ends meet. Things don't work that with you and me. When we have bills to pay and no money, credit cards work for a while, but eventually the credit card must be paid. And as you may have experienced, asking the credit card company to raise your debt ceiling often results in the opposite -- a reduction in your credit line."

Typical U.S. family 'never' erases credit card debt


A pair of Colorado bankruptcy attorney echo that sentiment and provide an interesting graphic to accompany:
Citing data from their American family debt infographic [click link or scroll down this page], Colorado bankruptcy attorneys Wink and Wink report that the median American family never pays off their credit cards. Wink and Wink have found that the median American family has carried at least $4,300 in credit card debt for more than 20 years, effectively never paying off their credit card debt.

"We live in culture that encourages debt," says attorney Gailyn Wink. "From politicians in Washington to individual families, too many Americans spend more than they earn. Sadly, that means the median American family is never able to get ahead of their credit card debt."

According to Wink and Wink, the median American family carries more than $170,000 dollars in debt while earning just $50,221 per year.

"Many families don't realize how long it will take to pay off their debts," says attorney Michael Wink, also of Wink & Wink. "When our clients add up all the money they owe and then compare that to how much they can afford to pay back, they're often shocked to learn it could take decades to become debt free. Fortunately, all Americans have a legal right to bankruptcy."

What's really behind that 'debate' curtain?


Although many believe Congress is ethically bankrupt, the federal government, of course, can not declare bankruptcy. Despite the hue and cry that failing to effect a new debt ceiling will be equivalent to bankruptcy for the U.S. economy, others counter the entire issue is political sleight of hand, a meaningless exercise with both sides acting as Oz's man behind the curtain.

Contemplating a return to crisis


A July 29 opinion in the Washington Post posits the question "Even if no default occurs, could a  U.S. credit downgrade trigger a financial crisis?"

As we approach Treasury’s debt-ceiling deadline, attention has shifted from the risks of a default on Treasury debt to the risk of a downgrade of U.S. credit. Many are asking whether a downgrade could itself lead to a financial crisis. With the example of 2008 still fresh in many minds, the question has become: Would it be as bad as the Lehman Bros. bankruptcy?

Some market observers speculate that a downgrade would be a non-event: Japan, for example, went from a rating of AAA to AA without much drama. Others suggest that a downgrade would increase Treasury’s borrowing costs by $100?billion a year or more, making our already unsustainable deficit trajectory even worse.

There are no rules to define what is systemic and what isn’t — or to accurately predict the consequences of an economic shock. Each crisis is unique. How exactly it will affect financial markets, companies and our economy is impossible to know. Nonetheless, recent examples offer guidance.

After considering several scenarios, the piece concludes, "These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock. The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down. We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out."

[more below the graphic]

U.S. Household Debt Load and CEO Pay versus Median Household Income

American Family Consumer Debt Facts

To be continued in Part 2, asking the question: Can the Treasury really bounce a check?

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Regardless of how Congress ultimately resolves the ultimate dog and pony expo, we consumers must face consumer-grade reality. If that includes considering filing for the powerful protection of the U.S. Bankruptcy Code, let us help.

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