The new bankruptcy law that goes into effect Oct. 17 could compound problems for people whose lives have been disrupted by Hurricane Katrina.
The new law will make it harder and more expensive for people to completely wipe out their debts, and consumer groups that oppose the law say it couldn't come at a worse time for Katrina victims. For one thing, they note, many will be unable to provide the paperwork -- tax statements, pay stubs and six months of income and expense data -- required by the new law. Nor will they have the time to attend mandatory credit-counseling courses.
Those groups are pushing Congress to delay the law's implementation date or change the law to guarantee that Katrina's victims will be able to get relief from their bills.
Debtors in the hurricane area who were planning to file before the Oct. 17 deadline can't even find a lawyer now, let alone an open courthouse, said Travis B. Plunkett, legislative director of the Consumer Federation of America. "They should have the right to file under the old law," Plunkett said. In the months ahead, hurricane victims -- or any victim in a natural disaster -- shouldn't have to face an increased burden of proof required by the new law, he said.
The new rules have enough flexibility to help people affected by the hurricane, bankers said.
"I'm guessing that by and large the people hardest hit are far below the median income," so they will still be able to file under Chapter 7, which allows people to completely wipe out their debts, said Wayne A. Abernathy, an executive director of the American Bankers Association.
Under the new law, those whose income is above the state median will have to file under Chapter 13, which requires some repayment to creditors -- unless they can prove that there is a special circumstance, such as health or military leave, or that their necessary expenses are so high that partial repayment is impossible. The new law doesn't cite natural disaster as a special circumstance.
Abernathy said he was confident that judges would be lenient. "I can't imagine judges demanding paperwork if it's washed away." However, he said, people in the hard-hit areas who are above the median income (about $53,500 for a family of four in Louisiana) and "who do have means to pay should not be able to walk away from their debts."
The new law's critics say it places too much of a burden on hurricane victims, particularly soon after it takes effect, when many of its details will have to be worked out in court cases.
Katrina's victims "will be the first guinea pigs through the bankruptcy system," said Elizabeth Warren, a Harvard Law professor and critic of the new law. "Some of these people will be able to persuade the courts that the new laws have as yet unseen flexibility, but it costs time and money to litigate those questions. Survivors of a disaster have neither."
Bradford W. Botes, a bankruptcy lawyer whose firm has several offices in the South, said that initially most Katrina victims will not even be thinking about bankruptcy.
But in four or more months, he said, when creditors start demanding payments and when the victims have yet to find jobs or jobs that pay what they were making before the storm, bankruptcy will seem like an attractive option, Botes said.
It's not just Katrina's victims who will consider bankruptcy, Botes said, but also consumers facing higher gasoline and heating bills. "If they are already on a tight line, that will push them over," he said.
Staff writer Amy Joyce contributed to this report.