Katrina victims to have tough time filing for bankruptcy under new law

Measure makes it harder to win relief from debts

Katrina's Wake

September 08, 2005|By Peter G. Gosselin | Peter G. Gosselin,LOS ANGELES TIMES

WASHINGTON - After virtually every major hurricane of the past 25 years, bankruptcy filings have grown at almost double their usual pace as victims sought to shake off old debts in order to rebuild their economically ruined lives.

But unless changes are made to a bankruptcy law overhaul that is due to kick in next month, many of those affected by Hurricane Katrina and the resulting floods will have a substantially harder time winning court relief from loans they incurred for homes and businesses that are now gone, according to a variety of judges, lawyers and policy experts.

"Just because your house or car is somewhere in the Gulf of Mexico doesn't mean that your auto loan or mortgage went with it," said Brady C. Williamson, who was appointed by President Bill Clinton to head a national bankruptcy commission in the mid-1990s.

"The new law is going to make it much more difficult for people to put their lives back together," said Kenneth N. Klee, a former Republican congressional staffer who was one of the chief authors of the previous major bankruptcy law change in the late 1970s and who now teaches at the University of California, Los Angeles.

Some Democratic lawmakers and consumer groups urged Congress yesterday to give Hurricane Katrina victims relief from the new bankruptcy law. Some Democrats on the House Judiciary Committee say they plan legislation that would give Katrina victims relief from the new law. Sen. Russell D. Feingold, a Wisconsin Democrat, said he will introduce a similar bill in the Senate.

When it passed the bankruptcy overhaul last spring, the Republican-controlled House rejected an exemption for victims of natural disasters.

The link between bankruptcies and disasters has long been assumed, but the extent of the tie is only now becoming clear in new studies by Robert M. Lawless, a University of Nevada, Las Vegas law professor.

Lawless examined the 18 hurricanes and tropical storms since 1980 that the National Oceanic and Atmospheric Administration said caused $1 billion or more of damage in the United States. He studied the pattern of bankruptcy filings in the states where the storms made landfall and compared that with the surrounding states and the rest of the country. He looked at the effects in the first, second and third year after the event.

His key findings: Bankruptcy filings, which have been rising nationally for 25 years, climbed at nearly twice the pace in landfall states as they did in the rest of the country and remained stuck at this high rate even three years after the disasters.

"Armchair economic analysis suggests that natural disasters are actually good for local economies because they spur reconstruction," Lawless said. "What these numbers show is the extent of the financial distress underneath whatever overall economic improvement there may be."

Bankruptcy overhaul supporters asserted Tuesday that the law would not impose undue hardships on victims of the Gulf Coast catastrophe. "There's nothing in here that is going to make it more difficult for people to get complete bankruptcy relief," said Jeff Tassey, the Washington lobbyist who headed a group of credit card companies, banks and others at the vanguard of the eight-year fight for the measure.

Tassey said that the law includes language that allows bankruptcy judges to take into account "special circumstances" such as the recent hurricane and flood. "There is plenty of flexibility to cope with situations like this," he said.

But critics of the new law say many filers will not be able to qualify for leniency because of paperwork requirements, among other reasons. The law says the debtor "shall be required to itemize each additional expense or adjustment to income and to provide ... documentation ... and a detailed explanation" under oath.

"There's no way many people are going to be able to provide all this paperwork; it's under water," said Keith Lundin, a federal bankruptcy judge in the eastern district of Tennessee and a longtime opponent of the new measure.

The new law also will impose much stricter limits on businesses, especially small businesses, filing for Chapter 11 bankruptcies. Under current law, businesses with court permission can continue operating - sometimes for several years - before settling on a repayment plan. But under the new law, big businesses have only 18 months. Small businesses have just 10.

The Los Angeles Times is a Tribune Publishing newspaper.

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