Katrina victims given easier bankruptcy regulations

Writing in the Washington Post, Caroline Mayer reports that "The Justice Department said yesterday that it would lift some requirements of the new, more restrictive bankruptcy law for natural-disaster victims.

The law, to take effect Oct. 17, will make it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy. Since Hurricane Katrina, consumer advocates and bankruptcy lawyers who opposed the new law have urged Congress to delay its implementation for hurricane victims for at least a year -- so far unsuccessfully.

The financial industry, which pushed for the new law, has said it is flexible enough to accommodate natural-disaster victims.

The Justice Department's trustee program, which oversees bankruptcy courts, said it would relax the strict Chapter 7 rules for victims of hurricanes and other natural disasters, allowing their loss of income and increased expenses to be taken into account in determining whether they qualify for Chapter 7, which allows debtors to completely erase their debts.

Without such a waiver, someone whose family income is above the median for his state might have to file for Chapter 13 bankruptcy, which requires some repayment of debt over five years.

"Even if they have disposable income to repay a portion of debt, if a calamity caused them to file," federal bankruptcy officials won't object to a Chapter 7 filing, said a senior Justice Department official who spoke in a conference call on the condition of anonymity.

The trustee office also said it would not challenge debtors who couldn't meet paperwork requirements because documents were destroyed in the hurricane. It said it would also allow evacuees to file their cases and attend hearings in courts in areas where they live now. [Source]

My two cents? That our national financial infrastructure companies really haven't thought through the long-term implications of the new bankruptcy law and its effect on financial institutions.

It's surprisingly common to read about banks and credit institutions talking up the new law to "get rid of scofflaws and slackers exploiting the bankruptcy system to avoid paying their debt" while consumer advocates continue to express concern and seek a delay in the implementation of the law. It's impossible to know exactly what the consequences will be, but I fear that a lack of flexibility in the law will make it just more bureaucratic red tape and potentially even push more debtors out onto the street.