Last month, the capital city of Pennsylvania filed for Chapter 9 bankruptcy protection. Harrisburg had taken out a $317 million loan to fund a municipal incinerator, but it didn't have the money to pay even interest on the loan, much less the principal.

So the Harrisburg City Council did what any debtor, backed into a corner and seeing no way out, would do. It filed for bankruptcy protection.

Court Calls "Backsies"

That was a big black eye for Harrisburg, for the state that surrounds it, and, crucially, for the mayor who allowed things to deteriorate so badly. So the mayor challenged the council's bankruptcy petition, and according to U.S. Bankruptcy Court Judge Mary France, Harrisburg was indeed legally required to get the mayor's sign-off before filing for Chapter 9.

The court threw the bankruptcy petition out, and voila! Harrisburg is magically not bankrupt anymore. Or is it?

Not So Fast, Tex

It's true that Harrisburg's not technically bankrupt. But unless Judge France slipped the mayor a 10-spot to tide the city over till it gets back on its feet, it still has the same problem it had before.

Bankrupt or not, Harrisburg is still insolvent. Keeping current on its debt would require selling off pretty much every revenue-generating asset the city possesses. And once Harrisburg sells them to pay this year's interest, it won't have any revenue streams left to pay next year's.

The only question now is whether the mayor makes a U-turn and leads the parade back into bankruptcy court or sells off assets to postpone the day of reckoning, setting the stage for Harrisburg Bankruptcy, Round 2, a few years from now. Or maybe the generous taxpayers of the rest of Pennsylvania will be asked chip in to save their capital -- by way of a state takeover of the capital city's finances.

In Even Deeper Debt Down South

Meanwhile, south of the Mason-Dixon Line, another high-profile municipal bankruptcy has struck, and it's a doozy.

Harrisburg's bankruptcy grabbed headlines because it's not every day you see a state capital pauperized. But in terms of size, its problems pale in comparison with the $3.2 billion hole that Jefferson County, Alabama, dug for itself while financing its new sewer system.

The biggest municipal bankruptcy in U.S. history was declared two weeks ago, when negotiations to reduce the county's debt to creditors including JPMorgan Chase (JPM) and Regions Financial (RF) broke down. Knowing they would get paid only what the county could afford if a bankruptcy case went to court, and also facing questions as to the validity of the debts (political corruption was alleged), lenders worked aggressively to cut Jefferson County's debt to manageable levels -- offering to write off as much as $1.2 billion. But it was all for naught. Negotiations collapsed two weeks ago, and Jefferson became the fourth municipality to declare bankruptcy this year -- following in the footsteps of Central Falls, R.I., Boise County, Idaho, and Harrisburg. (Like Harrisburg's, Boise's bankruptcy has since been rejected in court.)

The Story Behind the Bankruptcies

Unless you live in the cities and counties affected, you may wonder whether any of this matters to you. It does.

Eleven months ago, banking analyst Meredith Whitney went on 60 Minutes to predict that a wave of municipal bankruptcies would sweep the United States in 2011. Public finances were in such disarray that "50 to 100" municipal failures were likely, costing "hundreds of billions" of dollars. Happily, this hasn't happened. Whitney may have been right in 2007 when she was the lone voice crying "banking apocalypse" about Citigroup (C), but it looks as if she overstated the case on the municipal-debt crisis.

Or did she?

Just look at what happened in Jefferson County again, before the bankruptcy: The county owed $3.2 billion to its lenders, and the lenders offered to cut that debt to $2 billion, no questions asked. Why? You have to assume that the banks had their insurance set up to protect themselves in the event of a default, or that a peer such as MBIA (MBI) or Berkshire Hathaway (BRK.A) (BRK.B) had been contracted to step in and make good on its debt if the county couldn't.

So why offer to take a one-third haircut at all?

A Sneaking Suspicion

One has to wonder whether there's a reason the bankers didn't just trust their guarantors to pay off Jefferson County's debt.
Maybe they thought a bankruptcy so unlikely that they never took out insurance against it. Or maybe they worry that MBIA's balance sheet shows $12 billion more debt than cash, or that Assured Guaranty's (AGO) cash and debt are roughly equal, while the better-heeled Berkshire Hathaway has quietly exited the municipal-debt market, reducing its exposure to risks such as those we now see in Jefferson County.

It may not even matter whether the bankers have decided to forgo insurance against municipal bankruptcy risk, or whether they don't believe that insurance is worth the paper it's printed on. Either way, this pending local debt crisis doesn't look good for America's big banks -- or anyone who owns their stocks.

Motley Fool contributor Rich Smith owns no shares of any companies named above. The Motley Fool owns shares of JPMorgan Chase, Citigroup, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.

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Consumers' wallets are really getting the squeeze. Free checking is becoming even rarer, and fees for banking services and penalties for bounced checks are on the rise, according to Bankrate's checking study released today.

Free checking free fall
According to the survey, this year, only 45% of non-interest checking accounts offered were free, down substantially from the 65% offered last year and 76% two years ago. And the hurdles to qualify for fee waivers have gotten substantially higher.

For non-interest accounts, the average monthly fee jumped a staggering 75.5% this year to $4.37 over last year. One way to avoid the fee is to maintain a minimum balance in your account, but that minimum has jumped to $585 -- more than double from a year ago.

On accounts that pay interest, the average monthly fee rose 8.5% to $14.15. The requirement to avoid paying such fees is to hold a substantially higher balance of $5,587, up 44% from the previous year.

There are an increasing number of fee waivers, like signing up for direct deposit, Greg McBride, Bankrate's senior financial analyst, said in a statement. He added that 92% of non-interest accounts can become free or are free when factoring in these waivers.

ATM extortion
If paying a fee to park your cash in the bank isn't painful enough, consider what consumers are paying to get to their money. Fees for using an ATM operated by a bank other than your own are continuing to rise to record levels.

ATM fees hit a new high for the seventh consecutive year, reaching an average fee of $2.40 per transaction for non-customers of a bank's ATM, according to the survey. That average fee is 3% higher than last year.

When adding in the typical fee customers' banks charge them when using another bank's ATM, the total bill is an average $3.81 per transaction for an out-of-network ATM, Bankrate says.

"The ATM surcharge is almost universal, and it's been that way for years," McBride said. "The fee increasing every year is a function of somebody planting a flag every year and moving their fee up to that next threshold."

Consumers, however, can lessen the sting by placing an ATM-locator app on their smartphone or mobile device to point them to their own bank's money machine to avoid the out-of-network fees, or consider using their debit card to get cash back when making a purchase at a grocery store for a much smaller transaction fee, McBride noted.

Overdraft ouches
ATM fees aren't the only thing on the rise. Consumers with bounced checks or trying to access more funds than they have in their checking accounts with debit cards are also encountering higher overdraft or nonsufficient funds charges.

Overdraft fees reached a record for the 13th consecutive year this year, climbing 1% to $30.83. But if it's any consolation, the rate of the increase is slowing and still less than the Consumer Price Index that climbed 3.6% in the year prior to the study, McBride says.

Consumers also have an easier time these days avoiding such fees, because banks are now required to ask customers to opt into an overdraft protection program for their ATM and debit cards, rather than automatically signing them up.

If customers have insufficient funds and are not enrolled in an overdraft protection program, they'll be turned away at the cash register when trying to make a purchase, rather than being allowed to go forward with the transaction and later receive an overdraft protection fee hit.

McBride suggests that if you're not comfortable with the possibility of being declined at the register, many banks allow you to link your checking account to a savings account or line of credit, and they charge a lesser fee to draw money from those sources to cover a shortfall.

Bounced checks, however, are a different matter, and consumers will still have to pay lofty overdraft fees.

Motley Fool contributor Dawn Kawamoto does not own shares in any of the companies mentioned.

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America runs on credit. Before the recession in 2008, the U.S. consumer powered the economy forward with plenty of conspicuous consumption. Housing prices were on the rise, paychecks were plentiful, and the economy purred along as people used home equity loans and plastic to outspend their incomes.

Three years seems like a lifetime ago. Since the fall of 2008, our relationship with credit has changed dramatically: More Americans have been cutting up their credit cards than opening new ones, according to data from the New York Federal Reserve. During the last 12 months, people cancelled 199 million credit cards and only opened 168 million new accounts. And since peaking at the end of 2008, the average balance has declined more than 20%.

Unfortunately, our newfound fiscal restraint is killing the economy.

Good News/Bad Economy

Let's give high-fives and promotions to the millions of Americans reducing their reliance on credit cards and paying off their high-interest debt. They're doing the best thing for their families and futures. But more money in people's pockets ironically means less overall spending in the economy.

The fancy name for this phenomenon is "the paradox of thrift." If lots of individuals start saving more money to improve their own lives, the group could actually suffer, because less overall consumption leads to lower total savings.

If MasterCards (MA) and Visas (V) get swiped less frequently at stores across America, overall consumption drops. When people stop buying homes from PulteGroup (PHM) or McMansions from Toll Brothers (TOL), overall consumption drops.

America needs some level of savings to provide investment capital for its economy. We just don't need everyone to start saving or reduce their spending, all at the same time.

It's About Confidence

As the consumer goes, so goes our economy. We want happy consumers. Scratch that: We need happy consumers. Their spending keeps our economy running smoothly. Consumer spending makes up about 70% of our gross domestic product (GDP).

During the recession, frightened households reduced their spending. As the fear subsided, consumption returned. After all, consumers who aren't worried about losing their jobs, losing their houses, or collecting their next paychecks are much more likely to swipe their plastic and maintain reasonable balances.

Unfortunately, our confidence is waning once again. Recent Gallup polls show that upper-, lower-, and middle-income groups ($90,000 is the dividing line between upper and middle) cut back their average daily spending in August as their confidence in the economy fell. This may be a short-term blip, but it's not a good sign.

Student and Auto Loans -- That's a Different Story

American consumers may have gone on a credit bender in the second quarter, but the long-term trend for credit cards still looks slightly down to flat at best. Student and auto loans, however, continue to increase.

Going to school has always been a way to improve our lots in life. A good education helps us land that first job, earn that promotion, or change careers altogether. But with American businesses pulling all of their "We're Hiring" signs from the windows, going back to school today could be a risky endeavor if hiring doesn't pick up soon.

And while it's great to see people taking out loans to buy more cars -- after all, we've got to be able to drive to work or to the grocery store -- there's a dark cloud obscuring the silver lining. As the numbers of student and auto loans have risen, so have their 90+ day delinquency rates.

Type of Borrowing	Q4 2008 delinquency rate	Today's delinquency rate
Credit Cards	10.2%	12.2%
Student Loans	9.3%	11.2%
Auto Loans	3.9%	5%

Source: New York Federal Reserve, "Household Debt and Credit Report," August 2011.

The table above is a stark reminder. Debt, even in a low-interest environment, can cause lots of problems when it can't be repaid. With many Americans still trying to dig out from under the debt amassed in the early part of the last decade, the shock of the recession has brought even more pain as delinquencies spike and bankruptcies rise.

A Catch-22?

Keeping our economy on the path to recovery and avoiding another recession absolutely depends on loosening our collective purse strings and letting the money, and credit, flow. But we must do so in moderation. If delinquency rates rise again, credit will tighten back up and spending will go back down, increasing the likelihood of another recession.

It's a Catch-22 situation: The very thing that can help the economic recovery in the short term could end up hurting it even more down the road.

To see how David is investing during these turbulent times, follow him on Twitter at @trendsandtrades. You'll have access to all his research as well as the buys and sells he's making in today's volatile markets.

The Motley Fool's David Meier is Associate Advisor for Million Dollar Portfolio. He does not own stock in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Visa.

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The decision to buy a home is complicated, but answering these five questions can bring some clarity to this big-ticket decision.

1. Would it be cheaper to rent? If you're thinking of scooping up a condo these days, your best bet is taking a gamble on Sin City. Buying is a cheaper choice than renting in nearly three-fourths of the biggest U.S. cities, with foreclosure-flooded Las Vegas being the best place to do so, followed by Detroit; Mesa, Ariz.; Fresno, Calif.; and Arlington, Texas.

San Francisco-based online real estate firm Trulia compared the price of buying and renting in the 50 most populated U.S. cities. Price-to-rent ratios were calculated using the median list price compared with the median rent on two-bedroom apartments, condominiums, and townhomes listed on Trulia.com as of July 1. Don't think about taking out a mortgage in New York; Fort Worth, Texas; Omaha, Neb.; Seattle; San Francisco; and Kansas City, Mo., the survey suggests, where inking a lease is the more frugal option. Here's a rundown of cities where it makes the most sense to rent and where it's worthwhile to purchase a home.

2. How long do you plan to live there? If you can purchase for the same or less as renting, it makes sense to buy as long as you don't plan on relocating in the next few years, according to Craig Strent, CEO of Rockville-based Apex Home Loans Inc. Unless you plan to stay in the home for at least a few years, recouping your closing costs may not make buying worthwhile.

"For these particular buyers, I would tell them to not make the same mistakes as past homebuyers who were caught up in the housing frenzy," he said. "Buy when they are ready, not because it may be a good time to do so."

3. Is your credit good enough to qualify for a good rate on a mortgage? Thirty-year fixed-rate mortgages are at a record low 4.15%, according to Freddie Mac, making it a great time to buy for those who qualify. But that pool is small, thanks to picky banks and fewer people who can afford loans.

Lenders have started to rein in their reckless lending habits of recent years, so you must have a strong credit score to get the best interest rates. It might be worth putting off a purchase for a year while you improve your score. (Remember that the Fed has vowed to keep rates low for quite a while, so much steeper rates are not around the corner.)

4. How much money can you afford to put down? Try to put at least 5% down and avoid more expensive Federal Housing Administration loans, says Strent. Ideally, he continued, buyers should put 20% down.

5. Will the purchase leave you strapped for cash? "Price alone should never be the sole factor in deciding to purchase a home," said Ken Shuman, head of communications at Trulia. Instead, he suggests, buyers should first ask themselves whether they plan to live in the home for at least seven to 10 years, could make monthly payments on the house, and have enough cash in the bank for a down payment and an additional six to eight months' worth of mortgage payments.

Motley Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned.

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• Compare the likely actual cost of each option, Lehrer advises. Be aware that different companies arrange fees in different ways. The bottom line isn't the upfront fee or the interest rate, but rather the total amount of money you will have to pay out of pocket. If the only alternative is a bank overdraft fee, for example, a payday loan can sometimes be a good deal financially, he says.
• Check with at least two payday loan companies before signing up.
• Verify the domain of any website offering these services with a service such as VeriSign or McAfee, Schrage says.
• Be leery of using any service that sends you unsolicited emails.
• Figure out a realistic payback strategy. If it's going to take several pay cycles to pay the loan off, make your cost comparisons based on the entire life of the loan. The cheapest loan for the first week may not be the best over the life of the loan, points out Frank Dombroski, founder of FlexWage, which recently launched an employer-sponsored alternative to payday loans that allows employees to access earned wages that haven't yet been paid.

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