Hurricane Katrina and the New Bankrupcy Rules: Status Quo, Postpone or Exempt?

The press has caught wind of the impact Hurricane Katrina may have on its victims who will be forced into bankruptcy. Two issues are presented. First, many victims may not be able to file for bankruptcy before the October 17, 2005 effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This is important because under the new law, fewer individuals will qualify for Chapter 7 bankruptcy, which erases debt obligations. Many more will have to file under Chapter 13, which will require filers to pay back some debts. Some Members of Congress argue the case for delaying the law while others maintain that the new bankruptcy rules still allow for judicial discretion. The division falls along party lines as did the wildly partisan vote for passage of the Act.

A second issue deals with exemption. There's certainly a constitutional issue if the exemption only applies to Hurricane Katrina but there is an argument to be made that victims of catastrophic natural disasters, like victims of catastrophic illness, should be exempt from the Act's repayment requirements since they were forced into bankruptcy due to no fault of their own. There's no doubt that bankruptcy filings substantial increase in the years immediately following catastrophic natural disasters For example, research by UNLV Law Prof Robert Lawless indicates that bankruptcy filings in states hit by hurricanes and tropical storms increased 1 1/2 times those in states not affected by the same storms.

4-Person Family Median Income (2003 Census Data)

Alabama: $55,448 Louisiana: $50,529 Mississippi: $46,570

These issue revolve around the Act's conception of "needs-based bankruptcy" as reflected in the income test for determining Chapter 7 eligibility: whether the income of Hurricane Katrina victims is above or below the state median income.

Some evidence indicates that many Alabama, Mississippi and New Orleans victims may be eligible for Chapter 7. See the Center for American Progress report, Who Are Katrina’s Victims? (September 6, 2005) which compares the median income of families in affected regions with that state's median income. In each case the average median income in affected regions was lower the the state median income.

Status Quo, Postpone or Exempt?
The issue appears to be falling along party lines but one would hope that once the Republicans realize that exemption would benefit the middle class, legislative would be passed. By passage of the Act, the consumer credit industry got what it wanted for the long-term. Legislation with a human face is needed for victims of catastrophes like Hurricane Katrina.

Resources
National Association of Consumer Bankruptcy Attorneys' compilation of press and editorial coverage of the issue.
US Census Bureau Report: Median Income for 4-Person Families, by State

A (Very) Basic Legislative History of
the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

• P.L. 109-8, 119 STAT. 23 (pdf)
• House Report 109-031 Part 1
• Congressional Record
• Signing Statement of President Bush (with video)

See also: CRS Bill Summary and the CBO Cost Estimate