The Fate of Debt after an Economic Collapse

The U.S. economy has been holding on—barely. But they are facing $18 trillion in debt and by anyone’s account, that isn’t good or even remotely sustainable. It nearly crashed in 2008 and has yet to truly recover from that near catastrophe. With this in mind, an economic collapse in the U.S. is not just possible, but highly probable. The question is are you prepared?

What Will Cause Economic Collapse

First, let’s take a quick look at what could cause an economic collapse in the U.S. There are a number of various scenarios that are entirely possible, and if they happened, would lead to a collapse. These include:

  • The U.S. dollar quickly losing value: This would result in hyperinflation.
  • A run on the banks: Banks would close and lending and cash availability would disappear.
  • A cyberattack on the financial system: This would halt all electronic transfers of funds between people and institutions, paralyzing the banking system.
  • Terrorist attacks: This could cause the trucking and transportation system to come to a halt, leaving grocery store shelves empty and people hungry and getting desperate.
  • War: Yes, a major war would stretch the resources of the U.S. so thin, the economy would suffer.
  • Pandemic: If a serious pandemic broke out, it would badly damage the U.S. economy. Many people would not be able to work and the population would decline.
  • Lack of confidence in the Federal Reserve, the President, or an international event: A lack of confidence in any of these could cause people to stop spending money, slowing down the economy and causing a chain reaction.

Now, since the U.S. economy is such a large beast, it will be difficult to bring it down, but considering how close we came in 2008, it would be unwise to ignore the possibility. With these potential causes in mind, let’s take a look at what will happen if economic collapse were to become a reality.

Results of Collapse

The results of an economic collapse would be brutal. The following would be experienced by everyone:

  • No access to cash or lending: Banks would close, bank machines would cease to operate, and there would be no access to credit.
  • The supply of groceries, gas, and other needs would be low.
  • Civil unrest and criminal activity might become a problem.
  • Interest rates would increase substantially.
  • Demand for the U.S. dollar on a global scale would decrease as investors turned to other currencies.
  • Hyperinflation could become an issue.

In essence, with the collapse, the dollar would be worth less, but things would cost more. Survival in this society would be difficult.

What Happens to Debt

Do you want to see some staggering facts on debt? Here they are:

  • 69% of Americans are living paycheck-to-paycheck, with less than $1,000 in savings.
  • The average American household owes close to $8,000 in credit card debt.
  • The average credit card debt for households that carry a balance is $16,048.
  • 35% of Americans have debt in collections, meaning it is a minimum of 180 days past due.

Just think about these statistics. More than two-thirds of the U.S. population is living paycheck-to-paycheck and more than one-third has credit card debt in collections! That isn’t even taking into account any other type of debt. So if the economy collapses, what happens to all this debt?

The short answer? You still have to pay it back.

As long as your name is still on the books as owing and there is someone on the other end who is able to collect on that debt, they will want their money back. You will still be required to pay back your credit card debt, your line of credit, and all other loans. Your car can still be repossessed if you don’t make your car payments. And yes, your house can still be repossessed by the bank if you don’t make your credit card payments or the government if you don’t pay your taxes.

Just look at history. During the Great Depression, if people couldn’t pay their mortgage or property taxes, they lost their homes. Loans still had to be repaid. Now, I won’t pretend to know what will happen this time around, but I do know that the U.S. economy is on thin ice.

And here is the thing about thin ice—if it’s thin enough, when you fall through it, there will be very few warning signs. It will happen all of a sudden and then you’ll be in trouble, unless you prepare ahead of time. Even if you are prepared, it won’t be smooth sailing, but if you put on the economic equivalent of a thermal wetsuit before the ice breaks, then you will survive and come out stronger than most.

But what if the ice is not thin enough to break all at once? What if the collapse comes more gradually? Many argue it will, and it could. But then, you would be in even more trouble. As the financial health of the country spiraled down at a slower rate, all of your loan and mortgage payments would be required, no matter what. And if the economy did collapse quickly enough and badly enough to let you off the hook in the short-term, there is a good chance it would be brought back on track and then those debts would still be owed in the long-term.

Inflation or Deflation

When the economy goes sideways, the result will be deflation or inflation. The short version is:

  • Deflation (decreasing prices) increases your debt
  • Inflation (increasing prices) decreases your debt

While you don’t want debt in any economy, if you are caught in an economy with inflation, your debt will effectively decrease. Essentially, inflation often brings an increase in income, which means you will have more money to pay off your debt, which was money spent when things cost less. Obviously, this will only benefit you if your income increases and your interest rate doesn’t. There is a lot of risk with this scenario.

When it comes to deflation, the cost of your debt will effectively increase (even if your interest rate decreases). Every $100 you spend on your debt could purchase more when it comes to food, gas, and other necessities.

You are essentially taking your money and spending it on paying down debt you incurred when goods cost more. In addition, it is common for people to people and companies to reduce their spending when prices fall, which means that companies lose revenue and they need to cut jobs. If you lose your job, then you have no income with which to pay off your debt.

Ultimately, there is no way to know for sure what will happen when the economy collapses. Even though there is a chance you would come out unscathed or even better off if you carry debt into inflation, your safest bet is to protect yourself as best you can by getting out of debt and ensuring you stay out of debt. When you don’t owe the lenders money, you aren’t under their thumb and you can truly be self-sufficient and worry-free.

How to Protect Yourself

You need to protect yourself in case of economic collapse. That means preparing ahead and gathering both hard assets and getting out of debt. Each of these is equally important.

Hard assets

Chances are you already have some hard assets tucked away. These are the tangible items you need that will be difficult to acquire after a collapse and will bring you to full preparedness. They include:

  • Shelter
  • Food
  • Water
  • Supplies
  • Medical supplies
  • Arms and ammunition
  • Clothing
  • Any other items you would store away for a catastrophic event

This is what most preppers think of when they prepare for disaster or SHTF, but any major disaster is likely to bring down the economy, so your finances play a significant role in your ability to survive.

Get out of debt

Many people believe that after the U.S. economy collapses, they will no longer have to worry about their debt. This is valid—if the event is significant enough to really tear apart the fabric of the U.S. economy and life as we know it. Yes, a zombie apocalypse would qualify, as would an incredibly devastating pandemic, a major war, or a large meteorite impact. Essentially, the event would have to be incredibly catastrophic for the players in the financial industry to not be able to collect on their debt.

Most people have some form of debt, particularly credit card debt. Many people also have car financing/loans, college debt, a line of credit, and/or a mortgage.  Having said this, the first thing anyone should do is avoid getting into debt as much as possible. Instead of using credit cards, pay cash, and if you can’t afford it, don’t buy it. It’s really that simple, but not always easy. You can also alter your lifestyle to spend less money. The following are some of the ways you can do that:

  • Embrace DIY
  • Become a bargain shopper
  • Create a budget and stick to it
  • Be mindful of every dollar you spend and on what you are spending it

Second, you should pay off all the debt you do have as quickly as possible. There are great methods out there for paying down credit card debt, which is probably the highest interest rate debt you have. You can use this method:

  1. List all your debt from smallest to largest amount owing.
  2. Pay the minimum payment each month on all those debts and add as much extra as you can to the payment at the top of the list (if there are any that are the same, pay off the one with the highest interest rate first).
  3. Once the first on the list is paid off, add the minimum plus the extra you were paying on it to the payment of the second debt on the list.
  4. Continue this until everything is paid off.

You will feel good striking a debt off your list and over time you will get through them all. Then you can take the extra money you no longer have to pay on your credit card debts and apply it to your mortgage and other loans.

Final Words

In the end, getting your financial house in order is just good sense. Even if the economy doesn’t collapse, getting out of debt and living within your means is the smart thing to do. When you don’t owe money, you can be more self-reliant, no matter what happens in the world. And isn’t being self-reliant in the face of any event and any type of society what prepping is really all about?

Print Friendly, PDF & Email

About Karen Hendry

Karen Hendry
An urban prepper and rural wannabe, Karen has been working as a freelance writer for a decade and prepping for about half that time. She has gathered a wealth of knowledge on preparing for SHTF, but there is always more to learn and she has a passion for gathering and sharing that knowledge with other like-minded folk. Karen lives in London, Canada with her two children and plethora of cats. In her spare time she is writing the next great apocalyptic novel of our time, full of government conspiracy and betrayal at every level.

4 comments

  1. Avatar

    Excellent article!

    Tells it like it is without the BS.

  2. Avatar

    I’d be curious if you’d like to tackle the idea of putting money towards precious metals (PMs) vs. additional payments on debt. Ostensibly, the drop in underlying currency would result in a higher price fetched for PMs. Not that they PMs are ‘worth’ any more, but with the currency losing value, they would fetch more nominally.

    Then, debts could be paid with currency that is ‘worth less’.

  3. Avatar

    Very good article on the subject. Thank you.

    A few of my thoughts on the subject:

    I believe that one of the major driving forces that will be in effect in a large group of the population when one of the situations described in the article occurs will be frustration. Which leads to anger. Which leads to very bad decisions made by otherwise fairly stable people.

    The group is basically those people that have been servicing their debt faithfully, being careful to make payments on time, and in the case of mortgage and auto loan debt, making extra amount payments whenever they can.

    They have money in the bank, in retirement funds, in savings accounts, and are careful with their money. When suddenly they are in the position where everything they have done over the years, everything they have accomplished, everything they have accumulated, is now totally worthless, many will have a very difficult time dealing with it. Not just how to feed, clothe, and house themselves. I am talking how to deal with the situation mentally.

    Suddenly seeing themselves in the same position as the deadbeats, the slackers, the scam artists, the people that played the system and got by with it, while they worked so hard could drive a few over the edge. Perhaps more than a few, because rage seems to be contagious.

    Here they are, the money is in the bank, the investments are still there, the retirement funds still exist, and they cannot use any of it because there is no way to access it, or it is simply worth pennies on the dollar if they can access it. Frustrating. Very, very frustrating. Which becomes anger, and that is the start of those people lashing out.

    So, while all the advice in the article is great, and I essentially agree with it, I do think adding a category for preparing you to deal with the people that are going to turn to violence in one way or another will be important.

    And the second part of that situation is to make sure to prepare oneself for if/when those same feelings form in you. Because you do not want to be one of the ones to turn to violence because of that frustration and resulting anger. Preparing mentally to control or divert the feelings, to understand the whats and wherefores of what you are feeling and why, so as you do what is needed physically to take care of yourself and your families basic human needs, you can do it calmly, rationally, safely, and in a way that lets you and your family keep going while the madness is all around. The knowing is the first step, and when you know what can happen, you can have what you need for you to deal with the feelings. Something to think about.

    Another thing that I think that is extremely important if/when the economy collapses and having the resources to not just, as above, just take care of your and your families immediate basic human needs by taking the advice in the article, but having an alternative means of producing acceptable money substitutes. Barter and trade is fine, even having PMs, but for long-term maintenance of even a drastically reduced lifestyle there must be some sort of income. Because those debts still have to be paid, and most of the ones that must be paid are not going to want a couple rolls of toilet paper for that months rent. (Well, possibly for a while, but not long term.)

    So having the means and the knowledge of how to produce income, in whatever form that income might be that will be accepted by others for payment of debts, is as important, if not more important, than the immediate preps of getting through the initial phases of the situation.

    A business of some kind, that will produce or provide what other people in the situation will want and need. Not getting another degree in, say property management as a supplement to your office manager’s job. Producing or providing something that people will be desperate for is best, as always, but even the mundane daily living items will have value. So things like sewing. Food production and preservation. Perhaps simple hair cutting. Labor always has value, if you are in shape to do the particular types that will be needed.

    Think about the things you, your extended family, your friends, your co-workers, the others in you neighborhood, are all going to need, first, want second, and consider preparing yourself to provide those things not only for yourself, but for others. It must be clear in your mind what you will be willing to accept in exchange for what product, good, or service you be providing, but there are articles out there that get into that.

    Just my opinion.

  4. Avatar

    What about bankruptcy if yo have a huge debt load and don’t want to carry it into a collapse? Sensible option? Talking household CC debt over 50k.

Leave a Reply

Your email address will not be published. Required fields are marked *