What Would Happen if the U.S. Defaulted on Its Debt (2023)

FAQs

What Would Happen if the U.S. Defaulted on Its Debt? ›

So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.

A debt default could plunge the stock market as much as 45%. The U.S. could breach the debt ceiling as soon as next week, plunging the stock market by nearly half if a protracted default ensues, according to a White House projection.

In the event of a default the US government would face a severe fiscal crisis, leading to a significant reduction in available funds for all government programs, including veterans' benefits. This would result in delays to benefit payments until alternate funding has been sourced.

If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets. The United States was in a similar situation in 2011 when it got close to defaulting.

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

Stock market crashes wipe out equity-investment values and are most harmful to those who rely on investment returns for retirement. Although the collapse of equity prices can occur over a day or a year, crashes are often followed by a recession or depression.

The price of a stock can fall to zero, but you would never lose more than you invested. Although losing your entire investment is painful, your obligation ends there. You will not owe money if a stock declines in value.

What credit score is needed to join the military? In general, the military isn't looking for a specific credit score when determining financial eligibility, but excessive debt or delinquent payments could be a red flag for further discussions with your recruiter.

Military members who repeatedly fail to make payments or honor their debts can receive various punishments, including being discharged. The maximum punishment is a Bad-conduct discharge, forfeiture of all pay and allowances, and confinement for 6 months.

The VA doesn't offer military debt management programs, but service personnel are free to investigate them in their quest to get out of debt.

Has a US state ever defaulted? ›

State defaults in the United States are instances of states within the United States defaulting on their debt. The last instance of such a default took place during the Great Depression, in 1933, when the state of Arkansas defaulted on its highway bonds, which had long-lasting consequences for the state.

In 2011, S&P gave its first-ever credit downgrade to the U.S., cutting its rating to AA+. Over a decade later, that agency has still not restored its rating. A U.S. default could send shockwaves throughout the global economy and potentially cause a recession, according to experts.

Defaulted loans are not eligible for any of our student loan forgiveness programs. But if you take advantage of Fresh Start, you'll get out of default status. Then you'll regain the ability to apply for forgiveness programs, including Public Service Loan Forgiveness.

Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

Unfortunately, a stock market crash is likely to result in major declines in your 401(k) account balance, at least short term. How can I avoid losing money from my 401(k)? The best way to avoid losing money in your 401(k) — especially during a recession — is to avoid selling off all your investments.

And while theoretically possible, the entire US stock market going to zero would be incredibly unlikely. It would, in fact, take a catastrophic event involving the total dissolution of the US government and economic system for this to occur.

While most investors watched their fortunes evaporate during the 1929 stock market crash, Kennedy emerged from it wealthier than ever. Believing Wall Street to be overvalued, he sold most of his stock holdings before the crash and made even more money by selling short, betting on stock prices to fall.

Bottom line. Very rarely should you sell your investments to pay off debt. The one exception here is if you have high-interest debt (like an outstanding credit card balance), but even then there are alternatives to consider before using your investments as repayment.

What happens when stock price falls below $1? ›

If a stock's share price drops below $1.00 and remains below that level for 30 days, the exchange may notify the company that it is not in compliance with listing requirements and is at risk of being delisted.

If your crypto balance goes negative, you must pay back the amount owed.

Protection from foreclosure

If you took out a mortgage loan before entering the military, the SCRA requires your lender to get a court order to foreclose on the home while you are serving in the military and for one year after you complete your service. See more details about this protection.

Credit Checks and Military Branches

Excessive debt obligations that exceed half of the annual salary of the pay grade of the recruit can prevent enlistment. If debt includes mortgage debt, the total debt must not be more than two-and-a-half times the annual salary of the recruit.

Veterans may be at greater risk for money mismanagement due to lack of financial experience, targeted predatory loans, and service-related traumatic brain injury. The highest levels of financial stress were found in post 9/11 service members and those closest to retirement.

A recent survey found that 27% of service members had more than $10,000 in credit card debt, which can be difficult to deal with, the report said. That's compared with just 16% of civilians.

Is There a Debt Limit to Obtain a Security Clearance? No branch of the military has a set amount of debt that is the breaking point for security clearance. You could owe $5,000 or $50,000 and be granted or denied clearance. It's all a matter of how you deal with the debt.

Financial Bills: Servicemembers are responsible for their household expenses/bills while they are deployed. These expenses could include rent, mortgage payments, car payments, credit cards, etc. Before deploying you should ensure that you have made arrangements for these payments to be taken care of.

The military does not pay closing costs or give you money to buy a new home. Which is why many families choose to wait until closer to retirement or ETS until buying a home. And why they spend a lot of time saving up for their “forever home.”

Having a debt in the military can come with a variety of consequences. Involuntary repayment options are available to the DoD, including wage garnishments that allow them to collect what's owed. Additionally, certain funds received from the federal government are potentially subject to seizure until the debt is repaid.

Which country has defaulted the most? ›

States With the Least Debt in 2020

Mountain states, such as Idaho, Montana, Utah and Wyoming made the top-10 list, as did upper Midwest states like Nebraska, North Dakota and South Dakota. Alaska takes the No. 1 spot, with a tiny debt ratio of only 14.2%.

Payment of US national debt

On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.

America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...

Moody's currently has an "Aaa" rating for the U.S. government with a stable outlook - its highest creditworthiness evaluation.

At what age do student loans get written off? There is no specific age when students get their loans written off in the United States, but federal undergraduate loans are forgiven after 20 years, and federal graduate school loans are forgiven after 25 years.

The federal government won't take your home because you owe student loan debt. However, if you default and the U.S. Department of Education cannot garnish your wages, offset your tax refund, or take your Social Security Benefits, it may sue you.

Biden's one-time student debt forgiveness program is estimated to cost $400 billion over time. Individual borrowers who made less than $125,000 in either 2020 or 2021 and married couples or heads of households who made less than $250,000 a year could see up to $10,000 of their federal student loan debt forgiven.

How about Ireland, the Cayman Islands, and Brazil? Did you expect them to be substantial holders of U.S. debt? Then there are the countries that owe America money. Even though Japan holds the biggest amount of U.S. debt, the U.S. is also owed a lot of money by them too.

Why does the US owe China? ›

U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.

The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.

Japan tops the ranking with central government debt of 221 percent of GDP, followed by Greece, Sudan, Eritrea, and Singapore. Not long ago, the U.S. was among the least indebted countries.

A flurry of big spending packages and ballooning social welfare costs for a rapidly ageing population have left Japan with a debt pile 263% the size of its economy - double the ratio for the United States and the highest among major economies.

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

The U.S. debt is the total federal financial obligation owed to the public and intragovernmental departments. The U.S. national debt is so big because Congress continues both deficit spending and tax cuts.

According to the Bank of Russia's estimate, external debt of the Russian Federation as of March 31, 2023 totaled $357.9 billion, having decreased by $100.4 billion, or by 22.6%, since the beginning of the year.

Debt is often cheaper than equity, and interest payments are tax-deductible. So, as the level of debt increases, returns to equity owners also increase — enhancing the company's value. If risk weren't a factor, then the more debt a business has, the greater its value would be.

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.

Very rarely should you sell your investments to pay off debt. The one exception here is if you have high-interest debt (like an outstanding credit card balance), but even then there are alternatives to consider before using your investments as repayment.

What company has the most debt? ›

One guideline to determine whether you have too much debt is the 28/36 rule. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus debt service, such as credit card payments.

Debt-to-income ratio targets

Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.

Unfortunately, a stock market crash is likely to result in major declines in your 401(k) account balance, at least short term. How can I avoid losing money from my 401(k)? The best way to avoid losing money in your 401(k) — especially during a recession — is to avoid selling off all your investments.

The answer is yes, although under extraordinary circumstances. Globally, only a few markets have suffered total market loss. The largest and most well known markets that went to zero are Russia in 1917 and China in 1949.

"In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022, but a pivot from the Federal Reserve could drive an asset recovery later in the year, pushing the S&P 500 to 4,200 by year-end," the investment bank said in a research note.

Prioritize paying down high-interest debt

As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly. For most consumers, the biggest impact of these rate hikes is on credit cards.

Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.

Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.