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How to deal with debt limit meltdown

Fear of suspended government checks pushes a reader over the edge

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I am a retired military veteran and also draw Social Security benefits. Both checks are electronically deposited to my bank. If the debt ceiling is not raised and, if it comes to pass (for reasons I'm not even going to pretend to understand) that I don't get paid, I will not be able to pay my mortgages or other debt payments. If I got one check, I'd try to pay my mortgages first, obviously.

For my entire life, I've always paid my bills, so I've no clue how to deal with the banks on the mortgages and loans. Because I chose the military as a career, if the government is broke, I am broke! Should I forewarn the bank right now that my failing to be able to pay my bills could come to pass? If so, what do I tell them? (I assume sending the bill to 1600 Pennsylvania Avenue is not an option!  ;-D)

My bank owns my mortgage and loan. Can they just take the money out of my savings? Can they lock my accounts? I'm just going to assume that if I get a notice that I'm not going to get paid, or I only get one check, I should immediately (quietly) go to the bank and withdraw all my money -- it ain't that much, but maybe I can eat for awhile -- and then I can drop off the keys to the house as I leave?

I'm smart enough to realize after all this fiasco that if this passes and checks do go out, that I need to change how I need to manage my finances so I don't have to ask questions like this ever again.

So, what to do now and "The Day After" if the checks don't come? -- Naomi

Answer for the CreditCards.com expert

Dear Naomi,
Put away the camping gear, set down the phone and make yourself a nice glass of iced tea. It's summer, and you've got better things to worry about than financial Armageddon.

It's true that talk from politicians has been unusually rancorous lately and even frightening. I'll leave it to political columnists to comment on which side is mostly to blame, but it's important to remember that nothing is happening this month or next that hasn't happened before -- over and over again. We have budget "impasses" almost as often as we have budgets, and we've raised the debt ceiling so many times it's more of a cloud than a ceiling. And although the American economy bobs around a bit through the years, it is still by far the strongest, most stable economy in the world. We are very fortunate to live here.

If the government were to stop paying Social Security benefits and military retirement benefits, among other things, the results would be cataclysmic. That's exactly why it won't happen. It's like kids standing on the edge of the Grand Canyon, daring each other to take one more step forward. Eventually, nobody sane is taking any more steps forward because if they do, the results are far worse than any injuries to pride if they don't.

Another reason you'll still be getting checks next month and the month after is that the government is far, far from broke. It has the biggest piggybank it could ever want -- us! Social Security checks are funded by a dedicated payroll tax. According to the government's figure, in 2010, total Social Security income was $781.1 billion and expenditures were $712.5 billion. The Social Security crisis you hear about is over 10 years in the future, when we have fewer workers paying in and more of us boomers and post-boomers start getting benefits.

The last thing you want to do right now is call the bank and tell them you won't be able to pay your mortgage next month if the government checks don't come. Don't withdraw large amounts of money, either, especially if you don't have a very secure place to store it. (The chances of you being mugged on the way home or having your house broken into are much higher than your chances of losing money you have in an FDIC-insured bank!) And dropping off the keys to the house is a bit premature. If you had to quit making payments altogether, it would take months for the bank to foreclose -- possibly nine months to over a year, during which you would still have a place to live.

You're right, however, that this is a great time for you to change how you manage your finances. Start by learning more about money and how you can get to a place where you feel more financially secure. I recommend you find ways to reduce your debt and save up an emergency fund equal to three months' basic expenses, as a start. If you have a substantial amount of debt, consider seeing a credit counselor from a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

It's so easy to think everything's OK as long as just enough money comes in to cover our expenses and debt payments month by month. As you can see, that's living on the edge. The slightest disruption or fear of disruption in our monthly income can throw us into a panic when we have no backup plan. Even a federal budget crisis can have a positive effect, however, if it helps us all realize we need to manage our finances better so we never feel quite this vulnerable again.

See related: Emergency fund money critical in a crisis, 8 steps to picking a credit counselor

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Published: July 25, 2011


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