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Congress Ponders Katrina Bankruptcy Relief

By Martin H. Bosworth
ConsumerAffairs.com

September 28, 2005
The battle over protecting Hurricane Katrina victims from the new bankruptcy reform law, which takes effect Oct. 17th, continues with new legislation introduced in the Senate.

Louisiana Senators Mary Landrieu (D) and David Vitter (R) introduced a reconstruction bill earlier this week that includes rules designed to exclude victims of the disaster from many of the bankruptcy bill's harshest provisions.

The exemptions include being able include expenses incurred from Katrina damage as necessary monthly expenditures, for purposes of including them in the new "means test" for bankruptcy filers.

The bill also allows victims of Katrina to qualify for the "special circumstances" provision, which would enable them to file under Chapter 7 more easily.

The Landrieu-Vitter bill is similar to legislation introduced on Sept. 8th by Sen. Russ Feingold (D-WI), and to the "Hurricane Katrina Bankruptcy Relief and Community Protection Act of 2005," crafted by a team of House Democrats and submitted on Sept. 8th.

In the House, Rep. Louise Slaughter (D-NY) also introduced House Resolution (H.R.) 3662, "The Financial Safeguards for Hurricane Survivors Act," which would delay the implementation of the new bankruptcy law for two years, enabling Katrina victims to file for bankruptcy under the current rules.

Feingold's legislation would grant bankruptcy petitioners the right to file under the terms of the old bankruptcy laws for a period of one year.

"In the wake of what has happened, now is not the time to implement a bankruptcy overhaul that was so controversial that it could not pass Congress for seven years," Slaughter said in a press statement.

In a statement, Feingold said, "The bankruptcy system is an important safety net for people who suffer this kind of devastation. In this country, we do not sentence people who have been through a disaster of this type to a lifetime of financial servitude."

Efforts by House Democrats to get their bills onto the docket were blocked when House Judiciary Committee Chairman F. James Sensenbrenner announced he would not hold hearings on relief from bankruptcy for Katrina victims.

Sensenbrenner's rationale was that the most heavily affected victims of Katrina would be able to apply for bankruptcy and not face the difficulties of the "means test," which requires petitioners to demonstrate their inability to pay their debts.

"For someone who is genuinely poor and down and out and doesn't have the ability to repay their debts, there is no change at all," Sensenbrenner told the Milwaukee Journal-Sentinel. "I don't know why some of my colleagues are actually encouraging people through what they're saying to file for bankruptcy, because it's a stigma that wrecks your credit record for at least eight years."

Sensenbrenner received over $9,000 in campaign contributions from credit card companies and banks during the last election cycle, including $3,500 from MBNA and $3,000 from its new parent, Bank of America.

Sensenbrenner has received over $90,000 in campaign contributions from the banking and credit card industries since 1989, according to Public Citizen.

Slaughter introduced his bill on Sept.7th, before Sensenbrenner's statement on Sept. 15th. The bill is currently in the House Subcommittee for Finance and Consumer Credit, while the "Hurricane Katrina Bankruptcy Relief and Community Protection Act of 2005" is currently awaiting action by the Judiciary Committee.

The new bankruptcy legislation was signed into law by President Bush in May 2005. Ostensibly created in order to prevent abuse and frivolous filings, the legislation has come under harsh criticism from consumer advocates, bankruptcy lawyers, and financial experts as being too punitive to consumers.

Victims of Hurricanes Katrina and Rita will have especially difficult times applying for bankruptcy under the new laws, as the new procedures requires extensive financial documentation of one's holdings, and most individuals have lost much if not all of their documents during the storms and flooding that wrecked much of the Gulf Coast.

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