Hurricane Katrina and Bankruptcy Reform
All of us have heard the news reports about the horrible damage, displacement, death, and destruction caused by Hurricane Katrina. Most of us have heard the news reports about the damage estimates and about how this hurricane could be the “costliest” natural disaster in US history. I read a report that estimated the damage at $200 billion! As a bankruptcy attorney concentrating my practice in representing consumer debtors, I can’t help but think about the financial problems that each one of the millions of victims will have to face.
Most people living in the affected areas of Mississippi, Louisiana, and Alabama have lost their jobs, their houses, their cars, their furniture, their family heirlooms, and all of their financial papers. I read a report that says roughly 400,000 new unemployment claims were filed in Louisiana. How are these people going to rebuild their lives? Just because their house was destroyed doesn’t mean the mortgage was extinguished with it? Just because their car is destroyed doesn’t mean the debt goes away?!
Yes, hopefully most of the victims had insurance to cover their property losses, but no one had insurance to make sure they had a job to return to. Insurance doesn’t always cover all losses and sometimes there are high deductibles. Then think about people who had no insurance, they’ve lost everything except their debt!
While some financial institutions are granting 90 day forebearances on payments, issuing low-interest loans, and forgiving late charges, the fact is that many of the victims no longer have jobs. Even if they are able to find work quickly in another location, they will have to use their new wages to find an apartment, buy furniture, clothes, groceries, and other necessities. They aren’t likely to be able to start paying on credit card debt for many months.
I also read a report that showed that credit card usage among the displaced is skyrocketing. I can’t help but wonder how this debt is going to get paid. In many cases I’m sure people will struggle through it and if historical figures mean anything most will find a way to pay it off. But, what about those who can’t? They’re going to need to file bankruptcy.
Then, on October 17, 2005, the new bankruptcy legislation takes effect. Talk about a double-whammy! Unfortunately for the victims of Hurricane Katrina, most of the courthouses and attorney offices aren’t even open for them to try to rush in and beat the new law change.
Luckily, John Conyers (D-MI) introduced legislation on September 8, 2005 that would delay the applicability of some of the new bankruptcy reform provisions to victims of Katrina for a year. This would give victims time to file for bankruptcy before some of the onerous provisions of the new law make it more expensive and burdensome for them to get out of debt. Rueters ran a story around the 1st of September describing this problem.
Remember, there are plenty of “middle-class” individuals who lost their job after Katrina. These “middle-class” people may not qualify to file Chapter 7 under the new means test (see my discussion of the means test ) because their average income over the last six months would exceed the state’s median income and they may not be able to pass the means test. Thus, they could be left without any options since they can’t fund a Chapter 13 plan until they find other work and they can’t file a Chapter 7 because their average income over the last six months exceeded the state’s median income. These debtors would be relying on the Courts to take into account the situation and rule in their favor. I’m sure plenty of courts would allow these debtors to get relief, but I also am certain there would be plenty of costly litigation from creditors who may try to seek to enforce the means test against these victims. This costly litigation may not be affordable for people trying to get back on their feet.
I can only hope that both sides of the aisle in Congress can come together and give victims of Katrina a reprieve from the provisions of this new legislation. We’ll have to wait and see. Perhaps you could write your Congressperson and/or Senator and urge him/her to support Mr. Conyer’s proposals.
