Bankruptcy Law Stands

  Most of the coverage of the Hurricane Katrina disaster has focused on the plight of poor New Orleans residents and their day-to-day struggles to survive. But the storm's effects will linger for years, and many worry the financial hardships will force many from the area to declare bankruptcy, a step made more difficult by the reform law that went into effect Oct. 17.
  Unlike the poor trapped in the city when the levees broke, middle-class folks likely will be those most affected by the new bankruptcy law, experts say.
  "The people seen in the Superdome are largely judgment-proof," says Sam Gerdano, executive director of the American Bankruptcy Institute. It is those with mortgages, credit cards and automobiles, and whose jobs might be wiped out or interrupted by the hurricane that are at risk, he says.
  Washington did offer hard-hit consumers from the Gulf Coast some breaks. The U.S. Trustee Program, the division of the U.S. Department of Justice given added duties under the new bankruptcy law, announced in early October that residents of Louisiana and the southern judicial district of Mississippi seeking to declare bankruptcy would not have to go through credit counseling under a temporary waiver.
  Under the new bankruptcy law, consumers must undergo counseling 180 days before filing. The legislation allows the trustee program to waive the requirement if agencies in a judicial district are not able to provide adequate services.
  Gulf Coast filers also were allowed some leeway with the means test that determines whether they would be slotted in Chapter 7, where much of their debt is waived, or Chapter 13, where they must repay a portion of their debt over time. The new law requires consumers who earned more than their state's median income to be sent into Chapter 13.
  However, the trustee program announced that a filer that could prove adverse effects caused by a natural disaster could argue he deserved Chapter 7 treatment. The agency also reported it would not file enforcement motions against debtors in the region who lost documents in a natural disaster.
  Some politicians on Capitol Hill rushed, to no avail, to delay implementation of the bankruptcy bill for consumers in the Gulf Coast. The politicians were mostly Democrats and consisted primarily of opponents to the original bill.
  Bill supporters, including the American Bankers Association, contended the bill was flexible enough as originally passed to accommodate Katrina victims.
  That view carried the day, though Sen. Charles Grassley, (R-Iowa), the bill's chief sponsor, pledged to work with Louisiana's Republican Senator David Vitter to make changes if needed.
  Still, someone could be trapped in a cycle of mounting debt after a natural disaster caused a temporary loss of income, says Travis Plunkett, legislative director of the Consumers Federation of America.
  Fact is, mounting debt might not cause bankruptcy for years, says Robert M. Lawless, a professor of law at the University of Nevada, Las Vegas. Lawless recently conducted a study examining bankruptcy filings in federal judicial districts in the aftermath of 18 hurricanes.
  "People don't file for bankruptcy the day they're laid off," he says. "The spike is 12 to 36 months out. On average, for every two new filings in unaffected areas, you get three new filings in states hit by hurricanes."
  Bankruptcy filings in states where a hurricane landed were more than 46% higher after 36 months compared with unaffected states where rates rose 28%, according to the study.
  Lawless admits changing the bankruptcy law would not be "a panacea for victims of Hurricane Katrina, but it could help a significant number of people."
  Advocates and experts still see trouble ahead as the reforms take effect. Lawless contends the new law was poorly drafted and contains several contradictions.
  "But the proponents of the bill remain completely unwilling to do even a technical adjustment of the bill," he says.
  Bankruptcy judges might have to painfully reconcile the language as cases come up in court. "This will be a topic for some time to come," Lawless says.
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