Bankruptcy and Katrina: No one could have predicted it, Part III

Storm victims may suffer a second time around when the bankruptcy bill takes effect on Oct. 17.



Tim Grieve
September 27, 2005 5:00PM (UTC)

The New York Times says this morning that when Congress passed the bankruptcy bill this spring, "no one had the victims of Hurricane Katrina in mind."

Technically speaking, that's true: When the bankruptcy bill passed in April, Katrina was simply the name set aside for the 11th tropical storm to come out of the Atlantic in 2005, and it's safe to say that nobody paid any more mind to Katrina than to Jose or Tammy or Vince or Wilma.

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But as with those planes that were flown into buildings and the levees that didn't hold, someone could have predicted that the bankruptcy bill would have an unhappy effect on victims of natural disasters like Katrina -- and someone, in fact, did. As the bill headed toward passage, Democrats on the House Judiciary Committee noted that "natural disasters" are often a cause of bankruptcy filings. And as the committee deliberated, Rep. Sheila Jackson Lee specifically warned her colleagues about the need to protect storm victims from the bill's strict new requirements.

"Families that are affected by natural disasters such as a hurricane in Florida or the mudslides in California should not have to apply their scarce relief effort monies to bankruptcy debt," Jackson Lee said then. "The intent in providing federal and state monies to families who are victims of such natural disasters is to relieve the burden that the disaster has caused, not to increase their net worth. Bankruptcy reform should address many specific issues, such as the negligent mismanagement of money, but [to] hurt those who are already suffering from flooding or [a] collapsed roof or house that has gone out to sea is absolutely ridiculous."

The amendment Jackson Lee was proposing then went down on a voice vote in the Republican-controlled Judiciary Committee, and -- with the help of lots of Democrats in the House and in the Senate -- the bankruptcy bill went on to become law.

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As the Times says, the bill may now cause serious problems for people displaced by Katrina and Rita. The bill increases the amount of paperwork required to file for bankruptcy -- paperwork many residents of the Gulf Coast may have lost in the storms. It imposes a means test that requires people who earned a high income in the six months before declaring bankruptcy to stay in bankruptcy longer -- despite the fact that the storms may have caused a sudden shift in a filer's income-earning capacity. And it requires people who file bankruptcy to undergo credit counseling -- even if no amount of financial planning could have prevented the catastrophic effects a hurricane can have.

In theory, storm victims could rush to file bankruptcy before the bill takes effect on Oct. 17, but a lot of people won't know whether they need to file by then. And even if they do, bankruptcy law generally requires you to file in the federal district in which you've lived for the previous six months. As the Times notes, a lot of people who spent most of the past six months -- or indeed, most of their lives -- in New Orleans don't live there now and don't have much of a way of getting there anymore.

What to do? Some members of Congress from both sides of the aisle have suggested emergency legislation that would protect storm victims from the bill's requirements. House Republicans are having none of it. House Judiciary Committee Chairman James Sensenbrenner told the Associated Press that lawmakers who lost the fight over the bankruptcy bill in the spring should just "get over it" now.

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The White House has shown little interest in revisiting the bill either. Todd Zywicki, whom the Times identifies as a professor at George Mason University without mentioning that he was, until recently, a George W. Bush appointee at the Federal Trade Commission, says the bankruptcy bill, as written, is "perfectly suited to deal with circumstances such as this."


Tim Grieve

Tim Grieve is a senior writer and the author of Salon's War Room blog.

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