Should U.S. Bondholders Get Paid First?

by Jessica Sommerfield · 4 comments

US Money

Last week, the House passed a bill that would require bondholders and Social Security beneficiaries to be paid first in case of a failure to raise the ceiling on the national debt later this summer.

While the bill passed, there’s doubt it will get past the Democratic majority in the Senate; the White House has already promised to veto it. Even if this legislation doesn’t make it farther than the House of Representatives, it is stimulating debate about the real issue behind it — the national debt crisis.

The U.S. has already maxed out its $16.4 trillion debt limit, but thanks to a movement by Congress to ‘stall’ the crisis in January, the government has until at least May 18th and, most likely, longer. Obviously, the national debt crisis is the main concern of this session of Congress.

Republicans claim that the purpose in ensuring the Treasury is able to pay back its bondholders (largely foreign nations such as China) is to uphold the U.S.’ credibility on the global scale, as the ability of the U.S. to borrow funds in the future is doubtful if the U.S. defaults on its current loans. The measure would also prioritize Social Security to ensure funds are not withheld from beneficiaries who have been paying into the system their whole lives and are dependent upon it.

While these reasons seem legitimate enough, Democrats counter that the government can’t pay some of its creditors and not others, especially when so many other (just as important) government programs, such as veterans benefits and Medicaid, might suffer.

Although confronting the issue of the debt crisis will likely occur later this summer, national finances so far this year have been better than expected, allowing some breathing room before drastic measures are necessary.

Pay Our Creditors or Pay Ourselves?

While the House and Senate wrestle with these issues on a national level, there’s a personal application for the problem of debt management. There may be times you’re over your head in debt and face the decision of who to pay first or, even worse, who not to pay at all. 

Ideally, we should tackle our debts while they’re small and manageable, but some circumstances, such as severe illness, loss of income, scams, business bankruptcies, severe drops in stock, or identity theft, are beyond our control.

When you’re facing debt on every side, who do you pay first?

It’s always best to meet your outside obligations first, in order of importance.

If it’s helpful, make a list of your debts starting with those that are the most critical/nearest to default. You may be able to let smaller bills slide, especially if you know the grace period is longer on them. Many creditors are willing to make arrangements for smaller monthly payments, and are satisfied as long as they’re getting paid something.

Don’t be afraid to be bold and do some negotiating, since it may buy you some time to focus on getting your finances in order and avoiding bankruptcy. It can be humbling to have to admit you’re in a tight spot, but doing so can save you worse financial ruin.

Drop all unnecessary services. 

Drastic circumstances call for drastic measures. There’s no logic to getting manicures while you’re facing foreclosure, and you don’t need television, internet, or data plans on your phone. Temporarily canceling unnecessary services that won’t affect your credit score will free up cash you can apply to other more important payments, such as your mortgage, bank loan, or major credit card.

“Tightening up the belt” has always been a good way of coping in hard financial times, even though it can be hard to let go of the lifestyle you’re used to.

Do everything you can to avoid bankruptcy.

Although filing for bankruptcy seems like a good solution to people in severe debt, it’s never advisable. It may be a quick fix for the stress of creditors, but it will murder your credit score for years to come.

These are some ideas of how to prioritize repayment in a debt crisis.

Who and what would you pay first?

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{ 4 comments… read them below or add one }

John S @ Frugal Rules May 17, 2013 at 5:29 am

That is a tricky one, but I think in the interest of defense we better pay our obligations (as much as we can) to those we owe it to. This debt has the potential to be a major national security issue and I’d hate to see what would happen if we thumbed our noses to someone like China to pay ourselves first.

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Debt Blag May 17, 2013 at 11:06 am

I’d be surprised if this is even a legal possibility, given that creditors are paid pari passu in default. This won’t matter for domestic banks, but our debtholders might be able to sue us in London, Hong Kong, Singapore, etc.

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Jane Savers @ Solving The Money Puzzle May 18, 2013 at 4:50 am

Not the debt ceiling mess again. What is wrong with your government? Can’t they agree on anything? Washington shuts down for the entire summer so are they actively negotiating now? I guess that they aren’t and they are just arguing and pointing fingers and trying to win the next election without caring what happens to ordinary Americans.

I live in Canada and we have problems when our oversized southern neighbour is out of control. I will call all of you Greeks instead of Americans if this foolishness continues.

Perhaps the person who wins your giant Powerball lottery this week could donate some of their winnings to help your government deal with its mess.

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zimmy@moneyandpotatoes.com May 19, 2013 at 1:10 am

I would say absolutely not. The foreign purchasers of United States debt have just as much right to be paid as any American. The bond was purchased in good faith that it will be paid back under the conditions of it’s coupon and paid on time. If our government doesn’t want to pay all of it’s obligations perhaps it should start to reduce expenditures and the need to issue so much debt.

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