New Bankruptcy Laws and what it means for Katrina Victims

So, remember a few months ago when the Republicans passed a bill that would tighten the reigns on bankruptcy laws so that people can take personal responsibility for their own debt? No? Well you weren't paying attention and you should have. The stricter new personal bankruptcy law is to take effect on Oct. 17, intended to keep individuals from taking on debts they had no intention of paying off. It doesn't take into account genuine catastrophe like a medical emergency or a giant hurricane leveling your house, your job, your dog, your kids' school, and the rest of your personal belongings.

Right after Hurricane Katrina struck, several lawmakers - mostly Democrats but including some Senate Republicans - suggested that storm victims along the Gulf Coast should get relief from the new law's stricter provisions, which are intended to screen filers by income and make those with higher incomes repay their debts over several years. Under the old law, which remains in effect until mid-October, many more filers can have their debts canceled quickly in federal bankruptcy courts. But House Republicans, who fought off a proposed amendment that would have made bankruptcy filings easier for victims of natural disasters, said there was no reason to carve out a broad exemption just because of the storm...

In the meantime, many victims of Hurricane Katrina - and the much smaller group ruined by Hurricane Rita - will face a kind of Catch-22. Those who try to beat the Oct. 17 deadline in hopes of filing under the less-onerous current law may find it impossible to do so, because residence rules generally require that individuals seek protection against creditors in their hometowns. (Assuming people in New Orleans can find their lawyers and records, they can file for bankruptcy protection in their bankruptcy court, which has reopened and is sharing space with another court in Baton Rouge.)

Moreover, most people displaced by the storm will probably not know for months if they even need to file for bankruptcy. By that time, the tougher new law will be in force...

The new law also requires every individual to undergo credit counseling before filing for bankruptcy protection. "It's not right to make people who lost everything go through a course about how to manage their finances," Mr. Botes said...

"If you admit that the bill is bad for Katrina victims," [Professor LoPucki] said, "then there's really no reason it isn't bad for the others, too. They're all in some kind of problem. For most of them, it's largely their fault. But for a lot of them, it isn't their fault."

But what you of corporations? At least they will now have to pay up too, right? Wrong! Corporations can still declare bankruptcy and gain protection from creditors whether the underlying reason was a genuine catastrophe or sheer mismanagement.