Hurricane Katrina Reveals Flaws In New Bankruptcy Code
Coming shortly after the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the devastation wreaked by Hurricane Katrina tragically highlights what many consumer advocates believe are serious flaws in the new law.
Although the title of the legislation suggests that it is intended to stamp out abuses of bankruptcy law by dishonest debtors, the reality of the situation is that people devastated by Katrina-and millions of financially troubled consumers-are the ones being abused by the new law.
Even without the effects of Hurricane Katrina, the new bankruptcy law reveals itself to be incredibly harsh for those most in need of its protection.
It makes it much more difficult for consumers to seek protection by filing Chapter 7 bankruptcy, hitting hardest the working poor and those who have lost everything.
In fact, because the overwhelming majority of consumer bankruptcies are caused by illnesses, job losses, and divorce, not poor financial management or debtor fraud, the law only adds to the woes of those who need its protection to turn their lives around.
Hurricane Katrina magnifies the flaws in the new law. Under the new law, debtors are required to provide detailed information about their expenses and income in order to qualify for bankruptcy relief, and their attorneys must substantiate these claims.
But individuals whose records have been lost or destroyed by Katrina and the other hurricanes that have ravaged the Southeast this fall may be unable to provide these records and will be shut out of bankruptcy court-at the very time when they are in most in need of legal protection.
Fortunately, the federal government did step in to provide some relief to individuals harmed by Katrina.
The United States Trustee's Office-the federal agency which oversees litigation in the bankruptcy courts-issued rules that will relax the financial document requirement for individuals harmed by the hurricanes, and it also stated that individuals can rely on their hurricane-related hardships in order to establish the 'special circumstances' exception to avoid the harsh effects of the means test.
Nevertheless, the problem remains.
Individuals just one step away from financial disaster now have even less protection than they did previously.
One simple disaster-not necessarily one as devastating as Katrina-may not only throw these individuals into poverty, but it may also prevent them from taking advantage of bankruptcy to remedy their situation.