WASHINGTON - Bankers and consumer groups are sparring over whether more legislation is needed to ensure that courts go easy on victims of Hurricane Katrina that file for bankruptcy protection.
Though both said affected consumers deserve a reprieve, industry representatives said that major changes to the bankruptcy law that go into effect Oct. 17 already give courts enough leeway to allow consumers to cancel their debts. Consumer activists counter that because the law could force victims into repayment plans, the new rules should be postponed for filers in affected areas.
Reforms enacted in April allow courts to consider "special circumstances" when determining whether to require filers to repay their debts or have them cancelled.
The Financial Services Roundtable was drafting a letter Tuesday to the Justice Department recommending that courts consider the hurricane that struck the Gulf Coast on Aug. 29 a "special circumstance."
"All those people who might file for bankruptcy as a result of Hurricane Katrina, the bankruptcy reform law would not affect them," said Scott Talbott, the group's senior vice president for government affairs.
Edmund Mierzwinski, the consumer program director at the U.S. Public Interest Research Group, said there is no guarantee that courts would take hurricane victims' claims into consideration. "The industry could mount court challenges to any special circumstances victims can attempt to attest," he said.
The Bush administration is considering some relief from the new law as part of a package of help for victims of Katrina, the Associated Press reported Tuesday.
Consumer groups are pushing for Congress to delay implementation of the law for at least one year for people who were directly affected by the hurricane. Senate and House Democrats have introduced legislation that would do so, though few expect the measures to gain momentum.
"We give these efforts very little chance for success," the Stanford Washington Research Group said in a policy paper last week.
Rather, lawmakers are more likely to formalize a directive to courts to consider Hurricane Katrina as a special circumstance, congressional aides and industry sources predicted.
Hurricane response legislation also could deduct relief payments and hurricane-related expenses from the formula bankruptcy courts use to calculate if filers' income and assets are less than the median in their home state. The debt of filers whose income is below the line will be cancelled under the new law, but those above the line will be required to repay it.
