(MONEY Magazine) – JENNIFER AND DARRYL HAZELWOOD walk slowly across the weed-infested lawn of what was once their dream house. She has not stepped inside since it was swallowed by the floodwaters of Hurricane Katrina nearly a year ago.

What they see is a nightmare. Their couch seems to float in the air, one end perched on a kitchen counter, the other incongruously held aloft by a baby stroller. The TV cabinet has a large hole in the back where their big-screen model smashed through. The stench of mold is strong, and reminders of their lost life are scattered everywhere--dolls, books, pillows, a plastic cup here, a shattered table there.

There is no comfort in knowing that all the single-story homes in their middle-class neighborhood in New Orleans met the same fate thanks to a breach in the nearby London Avenue canal. The floodwaters turned their home into a giant toxic snow globe, their possessions floating around crazily for nearly a month until the area could be drained. "See this line here?" Darryl says, pointing to a spot a few inches below the ceiling. "That's how high the water was."

How does a family recover from such devastation--physically, emotionally and financially? That's the question Jennifer, Darryl and tens of thousands of other Katrina refugees are still struggling with. Since evacuating to Houston the day before the storm hit, the Hazelwoods have moved six times, most recently sharing a two-bedroom apartment with Jennifer's brother Brad and his wife in nearby Mandeville, La. The prolonged crisis has given daughter Emily, 21 months, nightmares and has upset 5-month-old Dylan's food and sleep routines. It has strained Darryl and Jennifer's marriage and sent her into periods of depression. "Yeah," she sighs during a tour of Brad's spartan guest room, where the four of them sleep, "this is getting old."

Still, the Hazelwoods, both 34, know they're faring better than most. They have gotten most of the insurance money they are owed. Jennifer is a public school teacher and co-owner of a successful ballet school. Darryl's construction job earns him plenty of overtime pay. And they recently took a huge step toward returning to their beloved city by putting in the winning bid on a two-family home in Lakeview, an upscale neighborhood they'd always coveted but could never afford.

Gambling that New Orleans will come back to life, however, is riskier than a blackjack game at Harrah's. The Hazelwoods' new neighborhood was as ravaged by Katrina as their old one, and the new house will need a year's worth of renovations before it is habitable. Their plan to finance the new house is dicey too. And they've just been told by brother Brad's landlord that they'll have to move again--six people in one apartment apparently violates fire-code regulations.

Meanwhile, somewhere off the Gulf Coast, new hurricanes are stirring. "The future," Darryl drawls with typical understatement, "is quite difficult to forecast at this moment."

The Flight from Katrina

Jennifer and Darryl met through friends five years ago at a karaoke bar on Bourbon Street. They are complete opposites, he says. He dropped out of high school to join the military; she's a college grad who loves ballet. It didn't seem to matter. They married in 2003, and Darryl moved into the modest house Jennifer owned near Lakeview, where most of her family lived.

When Katrina began sweeping across the Gulf Coast in August of 2005, Emily was nine months old and Jennifer had just learned that she was pregnant again. The couple were reluctant to evacuate; they'd spent 13 hours in gridlocked traffic the previous summer fleeing Hurricane Ivan, which turned out to be a dud. But on Sunday morning, they woke up to reports that Katrina had grown into a Category 5 monster and knew they had to go. Fast.

They grabbed clothes to last a few days, wedding pictures and a bag marked "vital documents" that included insurance policies and photos of the house. After driving all day and most of the night in bumper-to-bumper traffic, they ended up at a Marriott in Houston. They watched the collapse of the levees back home on the hotel TV. Darryl's mother called to say that she saw their house on the news--but only the peak of the roof. The rest of it had drowned in eight feet of water.

They moved three more times before settling into a two-bedroom rental outside New Orleans. (They moved in with Brad when that lease was up.) Dylan was born in April, and they were thankful he didn't have to come home to a FEMA trailer. But the gratitude wore thin as the magnitude of their losses began to sink in: their beautiful home, Jennifer's ballet school, their neighborhood full of family and friends. "After the baby was born," she says, "everything just hit me at once."

The children became increasingly fractious, and the relationship between Darryl and Jennifer grew strained as they fought about where they would live and what kind of house to build. "The storm seemed to either bring people closer together," she says, "or tear them apart."

Turning a Corner

One thing the couple didn't argue about was money. While New Orleanians from cabdrivers to Ph.D.s suddenly found themselves unemployed, the Hazelwoods were not among them. Jennifer did lose $800 a month in income when her ballet school was destroyed. And her salary dropped from $38,000 to $24,700 when she went on maternity leave in February. But her loss in earnings has been partially offset by a rise in Darryl's: As a handyman for a construction firm, he is busier than ever, doing grisly jobs like removing drowned animals from bank lobbies and shoveling out mounds of mud. He's on track to make $40,000 this year.

Not much federal disaster assistance was available for middle-class couples like the Hazelwoods. They received $4,358 from FEMA for emergency relief and rental assistance, and that was it. They counted instead on insurance to help them--they had about $240,000 in flood and homeowners coverage. They got their first two checks, totaling $50,000, six weeks after the storm. But the next payment, two checks totaling $62,000, took four months to arrive and was $20,000 less than expected. Darryl went back to the house and painstakingly documented each item; seven months later, the final $20,655 was approved. They're still waiting for the check.

But the Hazelwoods aren't complaining. Including a few other payouts from their insurance policies, the amount they've collected so far is more than $140,000--enough to pay off the $109,000 mortgage on their old house, erase $15,000 in credit-card debt and set aside $5,500 in a savings account. The rest went toward clothes, some furniture and dining out, especially on comfort food (creating what locals call their Katrina weight). Their food bills alone now run nearly $1,000 a month.

A Place to Call Home

What weighs most on the Hazelwoods is no longer having a home of their own. They can't go back to their old house--the damage is too severe--and they're tired of bouncing from place to place. They want to put Katrina behind them. But a year later, they still have nowhere to call home.

They know where they want to go. After months of looking and debating, the Hazelwoods have finally found their new dream house, a 20-year-old two-family brick colonial in Lakeview. It has a second floor to store precious belongings in case of flood and is built three feet higher than older buildings. Best of all, they'll be just 10 blocks away from Jennifer's parents.

Under ordinary circumstances, the Hazelwoods couldn't afford Lakeview. But these are extraordinary times, and their new neighborhood is a blighted wilderness of rats, broken glass, cracked roads and abandoned cars. The first floor of the new house has been gutted and must be completely redone before they can move in, which is why their bid of $198,000, for a place worth nearly $400,000 before Katrina, was accepted.

Even so, financing the purchase is tough. The Hazelwoods have no money for a down payment. They've gotten preliminary approval for a mortgage covering the entire price, plus another $80,000 loan to pay for the renovations. Luckily, their local lender has given them very favorable terms in a special financing arrangement created to help revive the area. Their 30-year mortgage has a fixed rate of 6.75%, and they're required to pay no principal and only 2% interest until the renovation is completed or for up to one year. The renovation loan is at 2% as well.

The real question is what will happen once the house is ready and their payments skyrocket from $400 a month to $2,355--more than 50% of their take-home pay. The Hazelwoods are counting on $900 a month from renting out half the house, plus $650 in income from the ballet school, which just reopened in a new location. But that assumes they can complete the renovations in one year in a city where demand for contractors far outstrips supply. And that the rental market remains strong. And that Jennifer's ballet school thrives.

The Advice

All the "what ifs" worry Lauren Gadkowski, a financial planner in Covington, La. Gadkowski works pro bono for hurricane victims (fpaprobono.org) and agreed to review the Hazelwoods' finances. Here is what she suggests.

• SELL THE OLD PROPERTY Darryl and Jennifer know they must demolish their old house. But they are considering holding on to the land as an investment. Local realtors estimate that the property would fetch around $50,000 now. Gadkowski's verdict: Sell it. Combined with their last insurance check, the sale could give the couple a much needed $70,000 to help finance their fresh start.

• PAY OFF DEBT use part of the proceeds to pay off the $4,800 they still owe on credit cards and the $23,300 balance on a home-equity line of credit. And resist the temptation to borrow against any equity they build up in the new home. "It's very dangerous to think of home equity as an ATM that you can get money from when you need it," says the planner.

• GET A GRIP The Hazelwoods bought their new house without taking a hard look at what their expenses will be. They didn't think about the new furniture they'll have to buy, for instance, or their child-care bills once Jennifer goes back to work. Even under the couple's most optimistic scenarios, Gadkowski believes, they'll feel squeezed when their mortgage payments rise next year.

So the planner urges the Hazelwoods to look for places to cut back. Consider buying an inexpensive car with some of the proceeds from the property sale, and dumping the $285-a-month wheels they're leasing now. Maybe put some of the money toward the new mortgage to reduce the payments. And eat out less, knocking off $200 or so from that $1,000-a-month food bill.

• LOOK TO THE FUTURE Gadkowski urges the Hazelwoods to save the rest of the money from the property sale for emergencies and their children's education. They should aim to keep about $15,000 in their short-term savings account, enough to cover at least three months of living expenses once their full mortgage kicks in. They should also set aside money for tuition at the local parochial school where they plan to send Emily and Dylan. Cost: $3,000 a year.

Jennifer and Darryl aren't sure how much of Gadkowski's advice they'll take. They're especially reluctant to sell the old property. But as the couple prepare for yet another move, they're keenly aware that they have a once-in-a-lifetime chance to start over on solid financial ground in the city they love, and they don't want to blow it. "I'm excited," says Jennifer. "I can't tell if this is really the end of the tunnel, but I'm definitely starting to see the light."

THE BOTTOM LINE

The Hazelwoods' insurance settlement will not be enough to finance a fresh start. The planner's advice: Sell the old property to help build a cash cushion.

BE READY FOR ANYTHING

Even if you don't live in a hurricane zone, disasters happen--from house fires to earthquakes. Make sure you're prepared for what may befall you.

PROTECT YOUR RECORDS

Make copies of vital documents and put them in a waterproof plastic bag. Include insurance policies, photos and video of your home and possessions, financial account numbers, deeds, titles and wills. Consider using an Internet storage service for computerized records. If your home machine is destroyed in a disaster, you'll still be able to retrieve your financial data.

HAVE READY CASH

Your emergency fund may not be enough to cover catastrophic expenses. So have an untapped home-equity line or a credit card with a zero balance that you can access in a hurry. "Don't be forced to break into your IRA," says Mari Adam, a financial planner in Boca Raton, Fla. And keep about $500 in cash on hand in small bills. When the power goes out, so do the ATMs.

GET THE RIGHT COVERAGE

Keep your insurance up to date. Get a rider to make sure your homeowners coverage increases along with the cost of reconstructing your home. Check whether your policy reflects recent changes in local building codes. As for liability, umbrella policies are cheap and ensure that you're protected beyond the limits of your individual policies. It's a good idea to buy one.