What Happens When The United States Goes Bankrupt

When the United States goes bankrupt, one consequence would be the loss of the US dollar as the global reserve currency, leading to the return of dollars held in many national reserve banks back to the US.

The current known federal debt is $31.7 trillion according to the web site, US Debt Clock, which is about $94,726 for every man, woman, and child who are citizens as of April 24, 2023. Can you write a check right now made payable to the United States Treasury for the known share of the federal debt of each member of your family after liquidating the assets you own?

A report released by the St. Louis Federal Reserve Branch on March 6, 2023, stated a similar figure for the total known federal debt of about $31.4 trillion as of December 31, 2022. The federal debt size is so great, it can never be repaid in its current form.

Some of us have been in or known families or businesses who had financial debt that could not be paid, when adjustments like reducing expenses, increasing income, renegotiating loan repayments to lender(s), and selling assets to raise money for loan repayment are not enough. The reality is that they still could not pay the debt owed to the lender(s).

This leads to filing bankruptcy under federal bankruptcy laws overseen by a federal bankruptcy court.

Chapter 7 bankruptcy is a liquidation proceeding available to consumers and businesses. Those assets of a debtor that are not exempt from creditors are collected and liquidated (reduced to money), and the proceeds are distributed to creditors. A consumer debtor receives a complete discharge from debt under Chapter 7, except for certain debts that are prohibited from discharge by the Bankruptcy Code.

Chapter 11 bankruptcy provides a procedure by which an individual or a business can reorganize its debts while continuing to operate. The vast majority of Chapter 11 cases are filed by businesses. The debtor, often with participation from creditors, creates a plan of reorganization under which to repay part or all its debts.

We saw these government entities file for Chapter 9 federal bankruptcy:

  • Orange County, California, in 1994 for about $1.7 billion
  • Jefferson County, Alabama, in 2011 for about $5 billion
  • The City of Detroit, Michigan, in 2013 for about $18 billion
  • The Commonwealth of Puerto Rico in 2017 for $72 billion

While testifying at a Senate Defense Appropriation hearing, US Defense Secretary Lloyd Austin and other senior Pentagon officials warned of the “Chinese threat” in the event of a US default.

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