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Bankruptcy Trustees Ease Rules for Katrina Victims

By Martin H. Bosworth
ConsumerAffairs.com

October 7, 2005
Victims of Hurricane Katrina will be getting a break from the tough new bankruptcy law after all. Although Congress offered no relief to the tempest-tossed taxpayers, the Justice Department says it is temporarily waiving some of the law's provisions that would hit hurricane victims hardest.

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

DOJ's United States Trustee Program, which administers bankruptcy laws, announced the following measures for storm victims along the Gulf Coast:

• Document Requirements Trustees will not enforce rules requiring extensive documentation of a consumer's assets if the documents aren't available because of a natural disaster;

• Means Test To file for Chapter 7 bankruptcy, the new law requires debtors to undergo a "means test," to determine whether they can pay back at least some of their debts. Trustees will treat income loss, expense increase and other adverse effects of natural disasters as "special circumstances" which can create a waiver of the requirement;

• Creditors' Meetings Trustees will "exercise flexibility" in enforcing the requirement that a debtor attend a meeting of creditors.

• Venue Trustees will "not raise or support venue objections" in cases where the debtor was displaced by a natural disaster, except in special circumstances. Thus, consumers who have taken shelter in another state would not have to return home to file for bankruptcy;

• Small Businesses Trustees will not take enforcement actions against Chapter 11 small business debtors who are not able to perform all the required steps because of a natural disaster.

Credit Counseling

The judgment covers some of the areas hit hardest by Katrina, including the eastern, middle, and western districts of Louisiana, and the southern district of Mississippi.

Under the new "Bankruptcy Reform and Consumer Protection Act," set to take effect on October 17th, petitioners for bankruptcy must undergo credit counseling within six months before filing for bankruptcy. The trustees recently published a list of agencies approved to handle credit counseling for bankruptcy filers on the Justice Department Web site.

Jane Limprecht, spokesperson for the U.S. Trustee Program, said that "The waiver currently in effect has a duration, and during that time, filers for bankruptcy due to Katrina do not have to attend credit counseling prior to filing. They can just go ahead and do so."

Once the waiver's duration is concluded, Limprecht said, victims of Katrina who file for bankruptcy will have to fulfill the credit counseling requirement before being able to file. The end of the waiver's duration has yet to be determined.

Several observers pointed out that none of the credit counseling agencies approved for usage are actually based in Louisiana or Mississippi, but are available for telephone or Internet-based consultations.

Commenting on the waiver at TalkingPointsMemo.com, University of Nevada law professor Robert Lawless stated that "[It] makes it pretty unlikely that credit counseling services are actually unavailable across the entire state of Louisiana and southern half of Mississippi."

Lawless is the author of a forthcoming study on bankruptcy and disasters that indicated bankruptcy filings increased by 50 percent in states hit by hurricanes over those that were not.

Members of Congress have been promoting legislation designed to ease some of the burdens of the new bankruptcy law on Katrina victims, including proposals allowing them to file under the old laws for one to two years. House Democrats' efforts to get the laws passed were blocked when House Judiciary Committee chairman F. James Sensenbrenner announced he would not hold a hearing on waiving or amending the laws.

Sen. Russ Feingold (D-WI), an opponent of the new bankruptcy laws, praised the credit counseling waiver, but said it was not enough for certain situations.

"[N]either the U.S. Trustee nor the Bankruptcy Court can waive a provision that makes it easier for landlords to evict their tenants who have filed for bankruptcy… This could compound the hardship faced by victims already made temporarily homeless by the hurricanes," Feingold said. "The victims of Katrina and Rita should not be the guinea pigs for the great bankruptcy experiment that will start in a matter of weeks."

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