If an Economy Collapses What Happens to Credit Card Debt?
Economic collapse doesn't end financial obligations or legal contracts. Credit card debt is owed regardless of the borrower's ability to repay. Economies can collapse due to high inflation or a depression combined with deflation.
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Inflationary Collapse
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Inflation decreases the value of currency. This increases the amount of money required to pay for anything. Those with fixed rate debt can pay off their devalued loan with inflated money if they have income. Those with variable interest debt and credit cards will have their debt increase at the rate of inflation or more. If their income cannot keep up with inflation, they will lose ground against their debt until defaulting.
Deflationary Collapse
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A collapse of the credit market or high personal savings rates due to high unemployment decreases the amount of money in circulation. Remaining money increases in value. However, debt does not deflate. For those with secured debt, the result is repossession of the collateral. For those with unsecured debt like credit cards, the options include bankruptcy or negotiating a settlement.
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Repayment obligations
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Debt collectors are still legally allowed to pursue borrowers in an economic collapse. Credit card debt is easier to settle for less than owed if there is deflation. Credit card debt is easier to repay if converted to fixed rate or secured debt.
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References
- "Financial Armageddon: Protect Your Future from Economic Collapse"; Michael Panzner; 2008
- "Crash Proof 2.0"; Peter D. Schiff, John Downes; 2010
- "Unemployment Insurance and Precautionary Saving"; Eric M. Engen; 1998
- "The Hyperinflation Survival Guide: Strategies for American Businesses"; Gerald Swanson; 2004
- "The Total Money Makeover: A Proven Plan for Financial Fitness"; Dave Ramsey; 2009
Resources
- Photo Credit depression image by momanuma from Fotolia.com
