The Debt Ceiling Deal: How Will it Impact You?

August 27, 2011 (Press-News.org) Each year, the U.S. Congress sets a budget to determine how the country will spend its money. However, the U.S. does not raise enough revenue to cover every dollar that is being spent. Therefore, the budget includes revenues that need to be borrowed from other sources. This part of the process does not necessarily include discussion about where the borrowed money will come from, or if Congress will okay borrowing these additional funds.

Back in April, U.S. Treasury Secretary Timothy Geithner stated that the U.S. would be in default on August 2nd of this year if the debt ceiling was not raised. This meant that the U.S. would not have the funds available to pay its financial obligations, and would need to borrow more money to pay the difference. Congress has to approve any increase in the debt ceiling, and negotiations between Republicans and Democrats had led to little progress.

Republicans wanted to cut spending, and refused to raise taxes to offset the gap. Democrats wanted higher taxes to go along with decrease in spending. Each side's proposals were quickly shot down by the other, which left much to be resolved before the August 2nd deadline.

Finally, on July 31st, both houses of Congress agreed to a complicated deal which increased the debt ceiling by $2.4 trillion in two stages. Neither side was able to get everything they wanted, but, in the end, the financial crisis that would have come from a default was averted. Part of the deal includes significant spending cuts, and also the appointment of a special committee to decide on further ways to streamline the budget. The recommendations are due later this year.

The deal took a long time to come together, which pushed the U.S. to the brink of default. As a result, and because the organization felt that the deal did not go far enough, Standard & Poor's lowered its view of the U.S. credit rating from AAA to AA+. After the S & P downgrade, stock markets tumbled across the world, leading many financial experts to feel a double-dip recession is inevitable.

While much of the focus has been on the global economic impact, this deal could have a significant impact on people right here in the U.S. Prices on goods and services will increase, and more and more people will be struggling to make ends meet. While the Federal Reserve has pledged to keep interest rates low for the next two years, people are still not spending like they did in the past. This will make it more difficult to develop and sustain a rapid economic recovery. For certain segments of the population, this deal could have an even more wide-reaching effect.

Have Credit Card Debt? Own a Home? When the U.S. received a credit downgrade, it made lending money to the U.S. more of a risk for lenders. More risk means a higher interest rate on any money that is loaned. This is closely tied to the rates that credit card companies use, so this could mean you have higher monthly payments on outstanding balances.

For homeowners with mortgages, the same holds true. Higher interest rates mean higher payments. This could potentially put more people in underwater mortgages, as people may owe more on their mortgages than the home could ever be worth. Even though the payments on the mortgage increase, the value of the home stays the same or decreases, leading to more potential foreclosures and bankruptcy filings.

Thinking About Retirement? The stock market, still struggling to rebound, also was severely impacted by the debt ceiling deal and resulting credit downgrade. The markets dropped significantly, meaning that many retirement accounts incurred substantial losses. It could take years before the full value of these assets is recovered. For baby boomers close to retirement age, this loss of assets could prevent them from retiring at a specific time.

This deal also affects those who have already retired. Much of the debate was focused on cutting spending, which places entitlement programs like Social Security and Medicare directly in the spotlight. For seniors dependent upon their monthly Social Security check, any changes to the amount that they receive could have very serious consequences. They would be unable to make up this loss of income by other means, and could lead to more seniors having financial problems.

Seniors also depend upon Medicare to help them receive the health care they need as they get older. Cuts to this program could leave many more seniors struggling to pay high medical bills, again placing them in a difficult financial situation.

Impact on the Future

While the long-term effects are still a long way off, the short-term implications have made things more difficult for many people. However, despite all the negative consequences that resulted due to the deal, it is still much better than what would have happened had the U.S. defaulted on its obligations.

If you are personally experiencing financial problems, speak to a bankruptcy attorney in your area to understand the best options for your situation. It is important to have this discussion sooner rather than later, as any delay could make certain options unavailable.

Article provided by Kingcade & Garcia, P.A.
Visit us at www.miamibankruptcy.com