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Calls for bankruptcy relief post-Katrina
Two advocacy groups ask Congress to exempt storm victims from new bankruptcy law.
September 7, 2005: 12:30 PM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) The brutal distress of the nearly one million people affected by Hurricane Katrina may be compounded for those victims who could face bankruptcy in the coming months.

Consumer advocates and bankruptcy attorneys are concerned that tens of thousands of people filing for bankruptcy in the wake of the storm will be unduly hindered by the provisions of a new bankruptcy law going into effect Oct. 17.

That's why the Consumer Federation of America (CFA) and the National Association of Consumer Bankruptcy Attorneys (NACBA) called on Congress Wednesday to postpone implementation of the new law for Katrina victims for a full year and permanently exempt them from specific provisions in the law.

The new law makes it harder for individuals to file for bankruptcy under Chapter 7, which allows them to clear their debts and get what's known as a "fresh start." It makes it more likely that those wishing to declare bankruptcy must do so under Chapter 13, which requires debtors to repay some or all of their debts within five years.

The new law also requires more documentation from filers, including pay stubs and tax returns, and subjects them to a means test based in part on one's average income over the past six months without regard to the source of the bankruptcy.

So for those who lost their jobs as a result of the storm and have zero income, the means test will reflect their average income for the six months prior to filing, during part of which they may have been receiving a paycheck.

CFA and NACBA are calling on lawmakers to permanently exempt Katrina victims from that six-month-lookback period for income in addition to what they consider unrealistic expense guidelines used in the means test. One of those guidelines assumes a gallon of gas costs $1.60, and none assumes a filer must pay for extended stays in hotels, said Brad Botes, a director of NACBA, in a press conference.

Among other provisions, the groups also would like to see the hurricane victims made permanently exempt from the credit counseling requirement under the new law, since advice on how to better manage their credit is not relevant to their situation and further delays their ability to get bankruptcy relief.

Plus, they want filers from Katrina-devastated areas to be exempt from the new paperwork requirements, since it's likely most if not all of their financial records have been destroyed. And efforts to plead their case to that effect will cost them more time and attorneys' fees.

Lawmakers express some interest

There is talk on Capitol Hill of providing special bankruptcy relief provisions for Katrina victims either in a bill or as part of a broader economic aid package. Representatives John Conyers, Jr. (D-WI), Mel Watt (D-NC), Jerrold Nadler (D-NY) and Sheila Jackson Lee (D-Texas), for instance, have said they may introduce a bill, as has Sen. Russ Feingold (D-WI), although they haven't offered specifics.

But a spokesperson for Senator Charles Grassley (R-IA) who sponsored the bankruptcy bill said there is no need for changes. "For personal bankruptcies, the special-circumstances provisions in the new law would certainly apply in this situation. The judge would take into account the devastating effect of the natural disaster and the wiping out of assets beyond a debtor's control," she told Money Magazine.

CFA's legislative director Travis Plunkett doesn't think a special-circumstances provision is fair to impose on victims of natural disasters since it slows the process for filers and imposes a higher legal burden (to prove they should be allowed a "fresh start") than exists under current bankruptcy law. Current law gives judges far more discretion early in the game to hear about a filer's extenuating circumstances without regards to a means test.

Victims of Katrina, Plunkett said, "shouldn't have to jump through hoops to get bankruptcy relief."

To learn more about the new bankruptcy bill, click here.

-- George Mannes, a senior writer for Money Magazine, contributed reporting to this article.  Top of page

Disasters (General)
Consumer Issues
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