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Bankruptcy Filings Soar In Advance of New Law
Hurricane Katrina victims Alice Lee and her husband, Richard, of LaPlace, La., check over paperwork for a bankruptcy filing. Storm damage at his place of work cut his salary by half.
(By Michel Ducille -- The Washington Post)
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For Katrina victims, the timing of the new bankruptcy law "couldn't be any worse," Louisiana lawyer Kevin Gibson said. Before the storm hit, Gibson's office was preparing about 15 cases. "We have only been able to locate about half of these people; we hope to hear from the others by the 17th. We sent out letters to the last known addresses, but I expect most won't receive them," Gibson said.
Louisiana lawyer Carolyn Patrick said the storm may harm some of her clients who were in the process for filing before Oct. 17 because they were forced to use their credit cards to pay for hotels, food and gasoline during the evacuation. Debtors are not supposed to rack up credit card bills for 60 days before filing because it would appear to be a deliberate attempt to avoid paying bills and creditors can insist on repayment.
With the deadline two weeks away, "we don't have time to wait until that presumption passes," Patrick said, adding she would fight any challenges in court.
Patrick and other Louisiana lawyers anticipate an even greater rush to file for bankruptcy from hurricane victims after the new law takes effect after mortgage companies start threatening foreclosure. Now, Patrick said, many mortgage firms have allowed homeowners to suspend monthly payments until January, but have said that all four monthly payments will be due then. When that happens, "people who never thought about filing for bankruptcy will walk in the door," Patrick said.
That will only be the beginning, according to a recent study by a University of Nevada law professor, which found that bankruptcy filing rates in areas hit by hurricanes increased sharply two to three years after the hurricane.
For the year to date, bankruptcy filings are up 14 percent, to 1.36 million from 1.19 million in 2004, according to Lundquist, a California financial research firm that reports on case information collected daily from all of the nation's bankruptcy courts.
Most of those petitions are for Chapter 7 bankruptcy, which are up more than 21 percent from last year, Chris Lundquist said. Filings for Chapter 13 bankruptcy, in which debtors are required to pay back at least a portion of their debts, are down 6.5 percent from 2004.
In the Washington area, Chapter 7 filings were up nearly 16 percent in the District for the first nine months of 2005, from the comparable period in 2004. In Maryland, Chapter 7 filings were up 1 percent, but they were down by 0.5 percent in Virginia. Bankruptcy officials in both states attributed the small number of filings to the healthy economy. The officials noted, however, that the filings have been steadily picking up in the past two months as the new bankruptcy deadline nears.
"Everyone expected a steep spike in filings," said Sam Gerdano, executive director of the American Bankruptcy Institute, a nonprofit education and research group made up of attorneys, bankers and bankruptcy professionals. But after Oct. 17, he said, the numbers should decline. The court clerk's office "will be as lonely as a Maytag repairman.
