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The Mother of All Bankruptcies May Be Coming


So bankruptcy filing rates for individuals and businesses are up -“ way up. They're expected to hit record levels this year. Indeed, with the recent bankruptcies of GM and Chrysler, we've seen some of the biggest filings in U.S. history during this recession. But an even more historic event may be on the horizon: the bankruptcy of the federal government itself.

Well before the auto giants filed bankruptcy, the federal government threw billions and billions in "bailout- money at GM and Chrysler, along with AIG, Citigroup, and other flailing banking industry giants. Then, of course, there's the crash of the housing market, which has been also very costly to the federal government. To help stimulate growth and clear the depressed properties off the market, the government has promised major tax credits for those who buy real estate in 2009. To help those who've been forced out of the housing market, the government has agreed to forego -“ through at least 2010 -“ the income tax that normally applies to canceled mortgage debts arising from foreclosures and short sales. All this adds up to billions and billions of dollars in lost tax revenue.

And don't forget the unemployment problem. Record numbers of people are collecting unemployment and social security benefits now -“ a huge drain on the government's cash-flow. Indeed, the government's been struggling for a long time now just to meet its general social security and Medicare obligations (right now, it's carrying $50 trillion in unfunded obligations between the two programs). Speaking of massive amounts of federal money going out the door, we also can't forget that little matter of the Iraq war (or maybe it's the "Afghanistan war- at the moment); the total cost of our Middle East endeavors will likely hit a trillion dollars before it's all over -“ if it ever is. This, of course, doesn't help with the staggering national deficit, which currently stands at more than $11 trillion.

Not surprisingly, the government's credibility as a reliable borrower has eroded internationally. Countries which used to clamor for the opportunity to become a part of the U.S. business enterprise are stepping back and thinking twice. And who can blame them?

With all this in mind, you might be wondering whether the federal government is going to need a bailout of its own, if it already doesn't. Could this era bring the mother of all bankruptcies, the bankruptcy of the federal government itself? And, if so, what can be done about it?

The government can always raise taxes or cut spending, but it seems unlikely that Americans could bear the kind of tax increases and cuts in services that would be required to bridge the vast budgetary gap. Forcing hyper-inflation in an effort to reduce the current level of the national deficit also does not seem a prudent or feasible solution in the long term. The government could also default on its obligations underlying the national deficit, effectively declaring insolvency. But the result would be cataclysmic to the U.S. and the global economies.

However the government ultimately handles these issues, it's going to have to get pretty creative to change the dangerous course it's on and avert an eventual collapse of the economy. In the meantime, the feds will have to deal with another big problem: states around the country (as many as 46 of the 50), including behemoths like California, are facing the real possibility of going bankrupt themselves. Many have already sought -“ and received -“ emergency federal funds to stay afloat. And, if they go bankrupt, they may actually file bankruptcy (they can do this under Chapter 9 of the Bankruptcy Code) -“ something no state has ever done before. This will effectively require the federal government to shoulder the debts that the states can't -“ making it even harder to see how Uncle Sam is ever going to get out of this mess.

The mother of all bankruptcies may be coming -“ if it already hasn't happened.

From: The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson. Call (toll free) +1-919-646-2654, to set up a free, confidential debt consultation. Visit for more information.

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