Solutions for Debt Crisis

Debt crises for individuals are very much like debt crises for nations. The debtor owes too much money to too many people. Hit with penalties and interest payments, the debtor will often spend all her financial resources merely servicing the interest on the debt and never attacking the principal. For both individuals and debt-plagued nations, the solutions to solve this crisis are similar.

Cut Back Spending

One of the simplest -- if often painful -- solutions to solving a debt crisis is to cut back spending. By spending less, the debtor has more money to pay back his creditors. By freeing up this cash, the debtor is not just treading water by paying interest, but gradually reducing the total size of the debt. However, sometimes cuts are so painful that the treatment can be worse than the medicine.

Restructure Debts

Another solution is to restructure debts. Sometimes, a debtor will be able to pay what he owes if only given more time to do so. If the debtor is allowed to change the repayment structure -- if, for example, he is allowed to reduce the payment size and interest rate and pay back the money over a longer period of time -- then both the creditor and the debtor may be placated.

Debt Settlement

Sometimes, a debtor will attempt to settle his debts for less than he owes. For both individuals and nations, this has the obvious benefit of cutting down the debt load. Many times, creditors are willing to settle for what the debtor can pay, on the principle that partial payment beats no payment at all. However, for both kinds of debtors, paying only part of a debtor will lower the credit rating and lead to higher interest payments on new loans.

Bankruptcy

A debtor can also, as a last resort, declare bankruptcy. For an individual, this involves declaring personal bankruptcy and allowing a judge control over many of his personal finances. For a country, this can take many forms, including simple declaring that it will not make good on the money that it owes, come what may. In both cases, the debtor's credit rating will be badly damaged, at least temporarily.