Debt settlement plans more likely than state bankruptcy

Eric Cantor

Congressional leaders such as Eric Cantor have insisted on debt settlement options before state bankruptcies can even be contemplated. Image from Wikimedia Commons.

There has been speculation that some U.S. states will declare bankruptcy due to budget issues, but debt settlement plans are more likely. Senior members of Congress have discussed it, but key Republicans have dismissed the idea. However, further loans from the government are not likely either.

State bankruptcy less likely than debt settlement measures

Most U.S. states, if not all, have encountered some sort of budget shortfall since the recession began in 2008. Fewer people employed — and therefore purchasing goods and services — combined with a sluggish housing market has exacerbated state budgetary woes. The idea of state bankruptcy has been discussed, but top Republican lawmakers are not entirely receptive to the idea, according to Reuters. House Majority Leader Eric Cantor expressed that debt settlement options exist outside of passing legislation to allow states to declare bankruptcy, including drastic spending cuts. The possible outcomes from allowing state bankruptcies could include the growing municipal bond market collapsing. However, it has also been made clear that emergency loans, like those included in the bailout packages, were not likely to be lent.

States insist bankruptcy not on agenda

Some state governors of states with budget woes have insisted that their respective states would not consider bankruptcy. Governors Christine Gregoire (Wash.) and Dave Heineman (Neb.) issued a joint statement to the effect that neither state would file for bankruptcy even if it were made an option legally. There are 44 states looking at a budget shortfall in the next year, according to the Center on Budget and Policy Priorities. Only six states — Alabama, Arkansas, Alaska, Delaware, North Dakota and Wyoming — are not expecting to be short fast cash at some point.

Toughest years possibly behind

Most economic forecasts have been for a slow but steady growth out of recession conditions. The possible ramifications for a state government to declare bankruptcy could be catastrophic, and thus the idea is too dangerous for lawmakers to contemplate. Federal bankruptcy courts would be tied up for years were that to happen.