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If you declare bankruptcy, will everything be OK in a few days, weeks?

July 27th, 2011

By Michael Collins

The crazies in the United States House of Representatives would have you believe it were so. They say fix that budget before we'll raise the debt ceiling. If we don't get our fix, they announce, there's no deal. We'll just default until things get straightened out. (Image: George Romero)

Let's see what would happen to you or me. We are unable to pay our bills, unless we tap a special line of credit that we've used in the past, one that has never failed us. We'll have to raise some money and cut some expenses too.

We're tired of paying bills and just want to stop for a while. We file for bankruptcy following all of the required procedures. The minute we file, we're granted an automatic stay on our debt. We are now protected, no bills to pay.

Then we get a few visits from creditors. They let us know that they know we can pay. Other people owed money show up also and ask, what is your problem? You owe us the money. You can pay and you will. The combination of angry creditors and recipients of our funds forces us to do what we could have done in the first place.

We tap the line of credit, cut expenses, and increase income. We make the payments we could have made all along. Once again, we have the choice of fixing things long term or repeating the process yet again.

What would happen to us? We would certainly hear from federal attorneys and the bankruptcy court. We lied to gain the stay. That's more than just inaccurate representations. It's fraud, a prosecutable offense. We would also hear from the creditors and recipients of our funds. They would demand restitution for damages based on any demonstrable harm from our fraudulent default.

In addition to criminal and civil consequences, we would be regarded as shady characters and real fools by our peers.

If Congress refuses to raise the debt ceiling, something it has done nearly seventy-four times since 1962, we will face similar consequences.

We have been accumulating significant debt since the Reagan administration, the claimed inspiration for many of the new members of Congress. Democrats and Republicans have participated in the annual tradeoffs of political benefits today versus neglected long term fiscal responsibilities. Robert Oak's article shows new expenditures contributing to the current debt. The main offenders are the wars in Afghanistan and Iraq and the Bush era tax cuts. This represents 3.2 trillion in new debt.

What happens if the United States defaults on its debt?

The US dollar is the world's reserve currency. People all over the world rely on the stability of the dollar. Since the dollar is tied to the government, if the government defaults, so much for the dollar. It plunges in value. There will be a world reserve currency to follow and it won't be the dollar. This will translate into immediate hardship here and abroad.

The cost of everything will go up as a result of default. Why? The credit rating for the United States will be downgraded and cost of borrowing will increase substantially for governments - federal, state, local - and for business.

The cost of credit and the general disruption will have an immediate impact on unemployment. Remember 2009? It will be much worse.

Since the United States has no need to default, the act will tarnish our image even more than it has been tarnished by dysfunctional government, military aggression, and financial fraud perpetrated by Wall Street (see Numerian's article). We're not the only game in town. There are alternatives. Imagine a marginalized nation seen as the world's leading grifter.

The default is not necessary. When you can't pay your bills, you cut expenses that don't generate revenue, war and defense spending. You increase available revenues. The Bush era tax cuts were to expire by now. Put them back in force. Those in the top 1% of the income bracket have had a nice run (see graph rebelcapitalist.com). Let them pay their fair share.

Offer the public input through an open debate based on honest information. What is the impact of cutting spending in a time of recession? What should be cut? What should be increased? What does a serious budget look like, one that benefits the people and nation in the mid and long term?

If default takes place, it will be predicated on a conspicuous fraud, just like our example of the fraudulent default by the individual who had no need to default.

The debt ceiling and a balanced budget are entirely separate issues.

Anyone who behaves as though this is not the case is simply lying. Worse, they're the enemy of the vast majority of citizens.

END

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