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Congress May Modify Bankruptcy "Reform" that Penalizes Katrina Victims

An Unnatural Disaster -- Congress -- Makes a Natural Disaster Even Worse

By Martin H. Bosworth
ConsumerAffairs.com

September 5, 2005
When Congress returns this week, several members of the House will introduce legislation to shield victims of Hurricane Katrina from the new bankruptcy law that takes effect on October 17th.

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The measure would "prevent new bankruptcy provisions from having adverse and unintended consequences for the hundreds of thousands now facing financial catastrophe by providing needed flexibility for victims of natural disasters in bankruptcy proceedings," Reps. Sheila Jackson Lee (D-TX), John Conyers Jr. (D-MI), Mel Watt (D-NC), and Jerrold Nadler (D-NY) said in a statement.

"Our common sense bill will insure that we do not compound a natural disaster with a man made financial disaster. We hope to obtain bipartisan support for expedited consideration of this critical legislation,” they said.

The insurance analyst group Risk Management Solutions has estimated financial and economic losses from Katrina at over $100 billion. Hundreds of thousands of families are homeless and destitute as a result of the storm along the Gulf Coast.

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It's estimated that more than half of New Orleans area homeowners did not have flood insurance and thus will not be covered for water damage to their homes, although they will be eligible for grants and low-interest loans administered by the Federal Emergency Management Agency (FEMA). But grant money is limited and the loan program is not without its problems.

After previous disasters, homeowners have complained that the loan application process was lengthy and bureaucratic.

Payouts from the National Flood Insurance Program can also be disappointing. A class-action suit was filed against FEMA and other agencies and private insurers in June 2005 by victims of Hurricane Isabel, charging that insurance payouts were inadequate.

Under the new bankruptcy legislation, homeowners' exemptions from liability are much more limited than in the past. As we previously reported, many homeowners who have refinanced their homes will be shocked to find that under the new bankruptcy act, they are liable for the full value of their home if it is destroyed.

The bankruptcy "reform" law restricts home equity protection to $125,000, if the buyer bought the house within four years of filing for bankruptcy.

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In addition, the new bankruptcy law forces consumers to pay much more to file documents and retain lawyers to prove their claims, pushing a bankruptcy filing out of the reach of many cash-strapped Americans.

War on the Poor

"Consumers who have already lost everything may now find they literally do not have enough money to go broke," said ConsumerAffairs.com President James R. Hood. "Every voter who is not a multi-millionaire should make it a solemn duty to vote against any Senator or Representative who did not vigorously oppose the shameful MBNA enrichment bill."

"This session of Congress will be remembered as officially ending the War on Poverty by replacing it with the War on the Poor," Hood said.

All four sponsors of the bankruptcy relief legislation voted against the original "Bankruptcy Reform and Consumer Protection Act" when it was introduced for vote in the House in April 2005. The bill passed the House 302-126, and was passed by the Senate rubber-stamped it shortly thereafter. President Bush signed the bill into law on April 20th.

Besides opposing the bankruptcy "reform" legislation, Rep. Watt has also targeted predatory lending for reform.

Along with Reps. Brad Miller (D-NC) and Barney Frank (D-MA), Watt sponsored HR 1182, the "Prohibit Predatory Lending Act," which bars lenders from advocating loans buyers may not be able to afford without explicitly outlining the costs of the loan. It also prohibits "mandatory arbitration and other nonjudicial procedures."

The bill is currently awaiting action by the House Subcommittee for Finance and Consumer Credit.

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