Storm Victims May Face Curbs On Bankruptcy

When Congress agreed this spring to tighten the bankruptcy laws and crack down on consumers who took on debt irresponsibly, no one had the victims of Hurricane Katrina in mind.

But four weeks after New Orleans flooded and tens of thousands of other residents of the Gulf Coast also lost their homes and livelihoods, a stricter new personal bankruptcy law scheduled to take effect on Oct. 17 is likely to deliver another blow to those dislocated by the storm.

The law was intended to keep individuals from taking on debts they had no intention of paying off. But many once-solvent Katrina victims are likely to be caught up in the net intended to catch deadbeats.

Right after Hurricane Katrina struck, several lawmakers -- mostly Democrats but including some Senate Republicans -- suggested that storm victims along the Gulf Coast should get relief from the new law's stricter provisions, which are intended to screen filers by income and make those with higher incomes repay their debts over several years. Under the old law, which remains in effect until mid-October, many more filers can have their debts canceled quickly in federal bankruptcy courts.

But House Republicans, who fought off a proposed amendment that would have made bankruptcy filings easier for victims of natural disasters, said there was no reason to carve out a broad exemption just because of the storm.

Representative F. James Sensenbrenner Jr. of Wisconsin, the chairman of the House Judiciary Committee, rejected the notion of reopening the legislation, saying it already included provisions that would ensure that people left "down and out" by the storm would still be able to shed most of their debts. Lawmakers who lost the long fight over the law, he said, "ought to get over it," according to The Associated Press.

A White House spokesman, Trent Duffy, said the administration "doesn't see a lot of merit" in calls to delay the law's effective date but was considering making allowances for hurricane victims.

In the meantime, many victims of Hurricane Katrina -- and the much smaller group ruined by Hurricane Rita -- will face a kind of Catch-22. Those who try to beat the Oct. 17 deadline in hopes of filing under the less-onerous current law may find it impossible to do so, because residence rules generally require that individuals seek protection against creditors in their hometowns. (Assuming people in New Orleans can find their lawyers and records, they can file for bankruptcy protection in their bankruptcy court, which has reopened and is sharing space with another court in Baton Rouge.)

Moreover, most people displaced by the storm will probably not know for months if they even need to file for bankruptcy. By that time, the tougher new law will be in force.

"Six to nine months from now, FEMA will be gone, the church groups will be gone and creditors will once more be demanding their money," said Bradford W. Botes, a bankruptcy lawyer whose firm represented victims of Hurricane Ivan, which struck Florida a year ago.

Keith and Bridget Cloud are among those already worrying about how to pay their bills while picking up the pieces of their lives. Mr. Cloud, 39, has owned a lawn care business in New Orleans for 12 years, employing four people. Ms. Cloud, 38, was a group-home manager for a nonprofit agency that sheltered homeless people. Two years ago, they bought a house, moved in with their five children and began paying down their mortgage.

"We weren't millionaires or anything, but we were just making it," Ms. Cloud said in a telephone interview from Houston last week, as the couple and their three oldest children were fleeing again, this time from the threat of Hurricane Rita, decamping temporarily in Laredo, Tex., and then in Corpus Christi. (Their two younger children are with relatives in Alabama.)

"If we have to file," Ms. Cloud said, "don't make it harder for us than it already is."

Personal and business bankruptcy filings usually reach a peak two to three years after a hurricane, according to a study about bankruptcy and hurricanes, soon to be published in The Nevada Law Journal, by Robert M. Lawless, a law professor at the University of Nevada.

Mr. Lawless said he was surprised by the pattern. Previous research on bankruptcy filings and natural disasters had not shown a connection, he said, apparently because analysts were looking only at the months immediately after floods or storms.

He said his finding was in keeping with research on the overall level of economic activity after hurricanes, which shows there is often a short-term growth spurt as federal aid and construction money are pumped into disaster areas. The bankruptcy filings come later, as people who have lost their houses or jobs are overwhelmed by the debts they incur while trying to rebuild.

"Areas hit by major hurricanes will suffer great financial distress and that distress will linger for long after the media glare has disappeared," Mr. Lawless writes.

Defenders of the new law note that judges will still have the discretion to waive its strict restrictions on filing under Chapter 7, a faster and simpler type of bankruptcy that, among other things, allows consumers to walk away from some obligations.

"There's nothing in the bill to suggest that you can get blood from a stone," Todd J. Zywicki, a law professor at George Mason University, said in an interview last week between Hurricanes Katrina and Rita. "The new legislation is perfectly suited to deal with circumstances such as this."

Mr. Zywicki said that as drafted, the new law still gave judges the discretion to identify victims of "special circumstances," like hurricanes, and to let them use Chapter 7 provisions.

But consumer bankruptcy lawyers worry that there is little incentive in the law for judges to give hurricane victims a break. They also complain about a long list of new demands it makes on individuals.

Among the hurdles in the new law that could most affect hurricane victims is a means test. It requires debtors to provide an estimate of their income by taking an average of their most recent six months' earnings before they can file under Chapter 7. Debtors with higher incomes are to be kept in bankruptcy status for several years, to pay off their debts.

But "someone who had a great job just before Katrina may have a very different income today," Mr. Botes, the bankruptcy lawyer, noted.

The new law also requires every individual to undergo credit counseling before filing for bankruptcy protection. "It's not right to make people who lost everything go through a course about how to manage their finances," Mr. Botes said.

The law has stiffer requirements as well for what records must be produced by the debtor. But hurricane victims will have a hard time doing that. "Thousands and thousands of people no longer have checkbooks, insurance papers, car titles (or cars), birth certificates, Social Security cards or wallets," a group of Louisiana lawyers said in a letter two weeks ago to the state's Congressional delegation.

The harsher requirements already had thousands of consumers rushing to file bankruptcy petitions ahead of the deadline. Despite a strong economy, quarterly filings for the period from April through June jumped 11 percent from the quarter a year earlier, to a record 467,333, the American Bankruptcy Institute reported.

Now, many previously solvent families and small businesses find themselves facing such pressure, but with little hope of getting into court ahead of the deadline.

"Think of the position of these debtors, many of whom would have not had to file bankruptcy otherwise," said Lynn M. LoPucki, a law professor at the University of California, Los Angeles. "They have until Oct. 17 to file under the old law that was less restrictive than this new law. But the odds that they can do that are pretty slim because the lawyers who would serve them are out in refugee camps somewhere."

The Cloud family is a good example. After Hurricane Katrina hit, they left for Houston, where they lived for a couple of weeks in the Astrodome. The day after they were given a temporary apartment, Houston was evacuated for Hurricane Rita and they drove in a borrowed car to Laredo. Bouncing from place to place, they have found it hard to determine the extent of their losses in New Orleans.

Mr. Cloud has returned to New Orleans just once so far. He found that the family house had been spared, but that his company's three trucks, only two fully paid for, had been destroyed. So the company will have to pay off a loan for one vehicle that no longer exists.

His insurer will cover only part of the loss, and it has warned that it will not cover the vehicles' contents. Mr. Cloud stored his riding lawn mowers and other costly equipment aboard the trucks, so he will bear those losses himself.

Ms. Cloud estimated that 80 percent of her husband's customers, mostly apartment complexes, were in the New Orleans flood zone. They have no idea when, if ever, the property owners will need his services again. While they wait, they are scraping together funds to buy new lawn care equipment and a truck.

Ms. Cloud has already received her last paycheck, so they will have to dip into their savings, she said. She has requested a small-business loan application from FEMA, but the papers have not yet arrived. Meanwhile, bills are coming due.

Ms. Cloud said she wondered if the family would end up in bankruptcy court. They had a near-miss once before, when her husband and his brother, then a co-owner of the lawn care business, had a dispute. They were able to resolve the problem without filing for bankruptcy, Ms. Cloud said, and she has been trying to call the New Orleans lawyer who helped them. So far, she has not been able to get a call through.

Professor LoPucki said: "These people could, I guess, go to bankruptcy lawyers in the places where they are. But they are supposed to file in New Orleans."

Individuals are supposed to file wherever they have spent most of the previous 180 days. That will pose a problem for long-term evacuees.

Michael D. Allday, a New Orleans lawyer, said he had one client, a single mother with medical bills exceeding $75,000, who had been planning to file for bankruptcy just before Katrina struck.

"Now she's lost her job on a riverboat casino," he said. The woman resettled in Little Rock, Ark., and Mr. Allday said he thought she should file there. But before she can do so, other bankruptcy lawyers noted, she will have to wait several months to fulfill the residence requirement. By that time, of course, the new law will be in force.

Professor LoPucki said he thought the majority of lawmakers were averse to enacting blanket bankruptcy relief for hurricane victims because that might raise questions about why victims of other uncontrollable events -- like accidents, major illnesses or mass layoffs -- should not get a break, too.

"If you admit that the bill is bad for Katrina victims," he said, "then there's really no reason it isn't bad for the others, too. They're all in some kind of problem. For most of them, it's largely their fault. But for a lot of them, it isn't their fault."

The Old and the New Following are some of the differences between the current law and the new bankruptcy laws:


Was enacted in 1978 and became effective in 1979.

Lets individuals choose between two forms of bankruptcy. The more popular, Chapter 7, lets people discharge unsecured debts, such as medical bills and credit card debt. But they can lose assets that secure debts, like houses or cars.

In the other type, Chapter 13, individuals try to pay their debts over three to five years, with protection from their secured creditors.


Was enacted in April and becomes effective on Oct. 17.

Requires filers to provide more documentation.

Requires all filers to complete a federally approved credit counseling program.

Allows filers to use Chapter 7 only if a means test shows that they earn less than the median for their state, and do not have enough income, after living expenses, to repay at least $6,000 over five years.

Requires filers with more resources to file Chapter 13.

Gives judges discretion to let higher-income debtors file under Chapter 7, if they have "special circumstances."