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How The Debt Downgrade Could Impact Your Finances

Posted By admin || 16-Aug-2011

Post-Bankruptcy Survival: How The Debt Downgrade Could Impact Your Finances

For debtors filing bankruptcy, the ability to rebuild their credit rating after their bankruptcy discharge is critical to their fresh financial start. But what about the impacts of a sluggish economy and more specifically the impact of America's first ever debt downgrade? How will the S&P debt downgrade impact the personal finances and credit ratings of debtors exiting bankruptcy?

Borrowing Money May Become More Expensive

While there is no guarantee that interest rates could increase, there is speculation that the cost to borrow money could go up.  For a debtor exiting bankruptcy, this could mean higher interest rates on credit cards, personal loans and even mortgages. Post-bankruptcy debtors who want to lock in low rates would be wise to search for loans with fixed interest rates to avoid "sticker shock."

Credit card interest rates are closely linked to the federal funds rate, so the debt downgrade is more likely to impact this type of short-term credit. If post-bankruptcy debtors already have variable rate credit cards or other loans, they may want to consider paying them off.

Unemployment Could Increase

As a few commentators have admitted, predicting exactly what will happen now that America's debt has been downgraded is challenging simply because it is unprecedented. However, the possibility of higher unemployment is a reality if the costs of doing business increases.  Debtors exiting bankruptcy depend on a steady income to pay debts which survive the discharge and to avoid a new set of financial troubles. But because most businesses are dependent on loans to operate, any increase in credit costs could prompt larger employers to implement another round of layoffs.

Post-bankruptcy debtors should increase their savings so that they have an emergency fund which could cover six to eight months of expenses in case they lose their job.  Since Congress and the Administration are preparing to hammer out deep budget cuts, debtors rebuilding their finances after bankruptcy shouldn't assume that the extended unemployment benefits will remain in place. Right now unemployment benefits have been extended far beyond the 26 weeks most workers are entitled to, but that extension may be dropped during budget talks. To minimize your exposure to additional debt troubles if you're unemployed, beef up your emergency fund and pay off short-term revolving debts.

Buying A Home Could Be More Difficult

Now that both Fannie Mae and Freddie Mac have received debt downgrades, debtors could find it more difficult to finance new home purchases. One of the unfortunate realities of economic turmoil is the tendency of credit markets to contract and stop the flow of cash.  Post-bankruptcy debtors who want to purchase a home should consider buying a cheaper home and offering a larger down-payment.

Categories: Economy
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