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3 debt solutions Uncle Sam doesn't have

Consumers who are overwhelmed by debt have more options than the government does to fix the problem.

By MSN Money Partner Jul 20, 2011 10:42AM

This post comes from Jeanine Skowronski at partner site MainStreet.


Our nation's debt crisis can be difficult to understand, but the fundamentals should sound familiar to those of you shouldering personal debt.


"Basically, the government doesn't take in enough money to pay off all of its bills," Mark Lieberman, a private economic consultant and former senior economist for Fox Business Network, tells MainStreet. He explains that currently, the U.S. borrows 43 cents of every dollar captured in its fiscal budget.


But while it's expected that our government will need to tap other countries for financing, the debt ceiling, currently set at $14.3 trillion, exists to cap just how much our country can legally borrow, and raising this ceiling -- which Republicans and Democrats in Congress are grappling over -- would be like taking out a new credit card to pay off an old one.


This is where the analogy ends. While consumers in debt undoubtedly feel burdened, their options extend far beyond digging a deeper financial hole. MainStreet decided to take a look at what options consumers have to get out of debt and why it's harder for the federal government to do the same thing. Post continues after video.

Make a lifestyle change. According to Clarky Davis, a debt expert with CareOne Debt Relief, consumers can usually wipe out their first few unpaid debts by "making a few small lifestyle changes."


The government can try to change its budget, but the process can be quite difficult since our fiscal budget is legal and amendments to it can get tied up (or lost entirely) in bipartisan wrangling.


"Debt gets paid first. Congress decides what gets paid next," Lieberman says. "The executive branch doesn't have the same discretion that an individual consumer has when it comes to how money is spent."


Negotiate a payment plan. As difficult as our federal budget may be to change, even more stringent are the contracts our nation has with countries that have leant us money. So while a consumer may be able to negotiate lower terms and conditions on his or her loan, the federal government is generally beholden to its original agreements with other nations. As such, the federal government also can't dismiss part of the debt through charge-offs or settlements the way a consumer can.


"Debt covenants are very, very strict," Lieberman says.


Conversely, when the government falls behind on any of its payments, it is immediately subjected to higher interest rates, just like consumers. But unlike the consumer, who is the only one beholden to the payments, these higher interest rates will drive up any other rates associated with the Treasury Department, which can then trickle down to individual consumers and have a negative effect on the economy overall.


For example, Lieberman says 30-year mortgage rates would go up, adding that if that happened, fewer people would be able to buy homes and the price of homes -- and their values -- would plummet.


File for bankruptcy. Consumers who can't pay off their debt can file for bankruptcy, which eliminates a large part of what they owe at the expense of their credit score. (Estimate your credit score for free.)


But Lieberman points out that bankruptcy "is absolutely not an option" for the federal government, because any change to its credit rating, at least in the eyes of other nations, will hamper the likelihood that they would lend to our nation again -- pretty scary considering how reliant we are on outside financing.


"When a consumer files for bankruptcy, they typically can't get credit for three to seven years," Lieberman says. Our government wouldn't be able to function if it couldn't borrow for three days, let alone three years, he says.


More on MainStreet and MSN Money:

Jul 20, 2011 11:16AM

The other thing consumers can due is ask the Fed to print money in order to davalue their current debt and make it easier to pay back. 


 Oh wait, it is the government that does that and screws the responsible person by devaluing the money they have saved.

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