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No Bankruptcy Relief for Katrina Victims

Rep. Sensenbrenner, Who Voted Against Hurricane Relief, Refuses to Hold Hearings

By Martin H. Bosworth
ConsumerAffairs.com

September 15, 2005
Survivors of Hurricane Katrina who were hoping to avoid the weight of the new bankruptcy law may be out of luck. Representative F. James Sensenbrenner (R-WI), chairman of the House Judiciary Committee, has indicated he will not hold a hearing on waiving the law for purposes of disaster relief.

Katrina & Bankruptcy • Bankruptcy Trustees Ease Rules for Katrina Victims • No Bankruptcy Relief for Katrina Victims • Consumer Group Call for Katrina Victims to Get Relief from New Bankruptcy Law • Congress May Modify Bankruptcy "Reform" that Penalizes Katrina Victims • After The Storm: Long-Term Pain

"If someone in Katrina is down and out, and has no possibility of being able to repay 40 percent or more of their debts, then the new bankruptcy law doesn't apply," Sensenbrenner said.

The new bankruptcy laws take effect Oct.17.

Thirty one Congressional Democrats had voiced support for waiving the more onerous provisions of the new law for Katrina victims "to insure that we do not compound a natural disaster with a man made financial disaster," according to a joint statement.

Sensenbrenner was one of 11 Republicans who voted against a massive relief package for Katrina victims.

His other legislative accomplishments include the "REAL ID" act, which mandates that state-issued drivers' licenses meet new federal requirements. It's been derided as a waste of states' money and an extra level of bureaucracy for local motor vehicle agencies, as well as a major target for identity thieves.

The new bankruptcy laws require passing a "means test" to verify if the petitioner can pay their debts via other means or not. Nathalie Martin, resident scholar at the American Bankruptcy Institute (ABI), said this will require "lots more in the way of paperwork, including providing pay stubs and invoices," much of which is no longer accessible postg-Katrina.

"Employees lost their paperwork records. Whole companies lost their paperwork. The technology requirements needed to maintain these records are simply not available to these people," Martin told ConsumerAffairs.com.

The Consumer Federation of America voiced similar concerns in a press release supporting relief from the bankruptcy legislation.

"These new requirements, coupled with strict deadlines for production upon the penalty of an automatic dismissal are difficult for the most organized person to meet, never mind someone who has had his or her home destroyed by Katrina," said the statement.

Martin noted that bankruptcy filings often increase after natural disasters such as hurricanes and floods.

"Many people will still qualify to file for Chapter 7," which allows an individual bankruptcy petitioner to liquidate their debts. "It may take one to three years before we really start seeing the effects of the new law."

In a poll conducted by ABI, 80% of its members said the law should be waived for up to two years to provide relief for Katrina victims, Martin said.

Katrina survivors are already starting to run up huge debts on their credit cards as they struggle to find new jobs, new homes, and new lives. Although many banks and credit card companies have offered leniency on payments and loans in the short term, the long-term effects of their displacement and loss of finances may put them hopelessly in debt.

The new bankruptcy legislation has been criticized by consumer-rights advocates and finance experts for turning the bankruptcy courts into "collection agencies" for credit card companies such as MBNA.

In addition to requiring extensive paperwork and mandated credit counseling for bankruptcy petitioners, the law also limits the protections of homeowners who have refinanced their homes, and broadens the definition of "nondischargeable" debts to include monies owed to "governmental units."

This could conceivably mean that Katrina survivors who received emergency loans from the Federal Emergency Management Agency (FEMA) might be liable to pay it back, even if they file for bankruptcy.

Nathalie Martin believes that even with these onerous new restrictions in place, banks and creditors will be sympathetic to victims of the disaster. "A bank is going to see that if you had a mortgage with them, they won't get paid."

Martin has authored a new book, "The New Bankruptcy Code and You," which explains the new laws in depth and offers advice to those considering filing for bankruptcy.

"ABI and other organizations like it are here to help the evacuees start over," she said. But she acknowledged that passing any kind of reform or repeal of the bankruptcy laws in the current administration was going to be an "uphill battle."

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