Controversy over effects of new bankruptcy law on victims of Katrina

September 25, 2005

Hurricane Katrina has rekindled debate over the controversial Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, in the U.S. House of Represenatives. Congressional Democrats feel that among the hundreds of thousands of victims of Katrina, many of whom have lost all their possessions and are coping with relocation, those that declare bankruptcy should be granted the protections of the previous law. 32 Democrats have sponsored a proposal that would delay implementing certain parts of the law to "insure that we do not compound a natural disaster with a man made financial disaster."

The new bankruptcy law affects anyone whose income (as of the six months before filing) was over the state median income. Democratic legislators point out that many hurricane victims who manage to find work will be suffering from wage reductions, making them unable to effectively deal with their previous debts. Among U.S. states, Louisana and Mississippi have the fourth and third lowest median incomes, respectively. Democrats also feel that it is unfair to require repayment by bankrupted Hurricane Katrina victims while citizens in other states with similar incomes would pay nothing.

F. James Sensenbrenner, Republican from Wisconsin and chairman of the House Judiciary Committee, has denied a hearing on creating an exception in the law for the purposes of Katrina relief. He noted that "If someone in Katrina is down and out, and has no possibility of being able to repay 40 percent or more of their debts, then the new bankruptcy law doesn't apply."

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has been heavily criticized by consumer rights' organizations. The Consumer Federation of America argues that "[the] new requirements, coupled with strict deadlines for production upon the penalty of an automatic dismissal are difficult for the most organized person to meet, never mind someone who has had his or her home destroyed by Katrina."

Opponents of the bill also argued that it makes the government "a bill collector for private companies", and could lead to criminal prosecutions over matters best left in civil courts, and theoretically even to life imprisonment under federal three-strikes laws. Such opponents view the bulk of the act either as "bought and paid for" by the Credit Card Industry, who spent millions lobbying in support of the bill, or else as an unfortunate compromise between the lobbyists for banks and bankruptcy lawyers, such as the American Bankruptcy Institute (ABI). Nathalie Martin, of ABI, said that "Many people will still qualify to file for Chapter 7," which means liquidation of assets in exchange for cancellation of debt.