Bankruptcy Law: Katrina and Rita

Bankruptcy in the past has allowed many financially strapped Americans to default on their high debt amounts enabling them to get a fresh financial start. The new bankruptcy law which goes into effect on October 17th 2005 will allow regulators to introduce tough federal bankruptcy laws that will make it more difficult and expensive for consumers to completely wipe out their debts. According to consumer groups and advocates, the new law creates additional burden on those who were affected by the recent hurricanes and should be given special provisions to overcome their financial hardships.

New Bankruptcy Provisions

The new bankruptcy law, which was signed by the United States Congress on April 20 th 2005 has made major reforms to the current bankruptcy polices. Not only do the new provisions make it harder to file for bankruptcy, it also offers very little protection to those who qualify for bankruptcy from their creditors.

According to the new legislation, consumers whose incomes are more than the state median are not eligible to apply for the Chapter 7 bankruptcy. The new law also states that consumers who can pay at least $100 a month to creditors are not eligible for Chapter 7 bankruptcy. Consumers who fall into the above categories have no options other than to apply for a Chapter 13 bankruptcy which requires them to follow a 3-5 year debt repayment plan.

For applicants with special circumstances such as serious health conditions, military leave and other necessary expenses that prevent them from making minimum creditor payments are allowed to file for Chapter 7 bankruptcy. However, hurricane victims or any other natural disaster victims do not fall under this category as the new law does not cite natural disasters as special circumstances.

The Effects on the Victims

Victims of hurricane Katrina and Rita who have lost their jobs, homes and businesses are more likely to apply for bankruptcy in the coming weeks and months and the new law will only add more burden to their already unstable financial conditions.

The new law insists that all bankruptcy applicants must prove to the courts that they are currently broke and have been so for the past six months. Victims of hurricanes who lost their entire livelihoods in a matter of days would not qualify under this particular provision.

The new law also requires applicants to produce additional documentations such as pay stubs, copies of past tax returns, bank statements and other financial documentations which most of the victims no longer have access to.

Other provisions such as requiring all bankruptcy applicants to undergo credit counseling will also create additional burden for those, who in the past had no difficulties handling their personal finances. Consumer advocates argue that since most of these victims are in dire financial conditions due to no fault of their own, they should not be forced to undergo credit counseling.

How to Resolve This Situation

The Consumer Federation of America (CFA), National Association of Consumer Bankruptcy Attorneys (NACBA) and other consumer groups are pushing Congress to delay the implementation of the new law or waive some of the above provisions for the victims of hurricanes Katrina and Rita. Currently, legislators are looking into providing special bankruptcy relief provisions for these victims. Many bankruptcy analysts believe that the legislators will include a specific provision in the ‘special circumstance’ category that will allow courts to award Chapter 7 bankruptcies for the victims of hurricanes on a case-to-case basis.