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Relief package could offer grace period from bankruptcy rules

BILOXI, Miss.—The Mississippi and Louisiana congressional delegations are crafting a massive hurricane relief package, to be filed as early as Friday, that could include a grace period from tough new federal bankruptcy rules.

The bankruptcy law that takes effect Oct. 17 will make it harder for some people to erase their debts. Hurricane survivors also will have to produce financial records that might have been lost, and set aside time to take financial-planning classes at their own expense, if they can find such classes in devastated areas.

Experts say a spike in bankruptcy filings is inevitable in the next few years as some people who lost homes and jobs fall into debt.

Three weeks after Katrina hit, clerks report no rise in filings at U.S. Bankruptcy Court in Jackson, Miss., which is handling cases indefinitely from the closed courthouse in Gulfport, Miss.

"It's too early," said Gretchen Kimble, a lawyer offering free legal advice at a FEMA Disaster Recovery Center in Gulfport. "People are just now digging out and trying to get their lives in order. They're still thinking about food and shelter."

Officials with the federal bankruptcy court in New Orleans said that before the hurricane, attorneys had indicated that they planned to "file like crazy" in the weeks leading up to the deadline for the new law. But the court's electronic filing system was knocked offline for weeks after the storm.

Court officials moved operations to Baton Rouge, La., and restored the system late last week, but too few filings have come in for them to know what effect the hurricane has had.

"Nobody wants to file for bankruptcy," said lawyer Brad Botes, who has offices along the Gulf Coast. "But six months down the road, 12 months down the road, some people are going to realize they have to. And by then, these new rules will have slammed down."

In Congress, where passage of the bankruptcy law was a major battle earlier this year, lawmakers are debating whether to add a last-minute loophole so Katrina survivors could file under the current rules even after Oct. 17.

"The current law is already no walk in the park," said Travis Plunkett, legislative director of the Consumer Federation of America. "We think the federal government should do everything it can to get these people back on their feet and not trip them up with these onerous new restrictions."

Backed by Democrats, Senate and House bills that would delay the new bankruptcy rules for Katrina survivors have sat since Sept. 8 without receiving hearings from Republican-led committees. Of the Louisiana and Mississippi delegations, only Sen. Mary Landrieu, D-La., and Rep. Gene Taylor, D-Miss., signed as co-sponsors.

However, congressional aides to the delegations say it's likely a grace period will be included in the sweeping Katrina-relief legislation that emerges in coming days.

Details, such as the length of the grace period, still are being worked out. The bulk of the legislation will deal with other issues, from housing and health care to agriculture.

"Frankly, our emphasis has been on trying to make sure people don't need bankruptcy," said Brian Martin, Taylor's policy director.

Sen. Thad Cochran, R-Miss., said in a statement that "one of the specific concerns we are faced with is making sure the victims of the hurricane are not adversely affected by new bankruptcy legislation." A spokesman for Sen. Trent Lott, R-Miss., said Lott "would take a look at anything that's designed for relief from Katrina."

A recent study by Robert Lawless, a University of Nevada law professor, showed that bankruptcy filings can jump up to 50 percent in communities within three years of a major hurricane strike.

Not only are most people unwilling to admit defeat until they are forced, said Botes, a board member of the National Association of Consumer Bankruptcy Attorneys, but simply gathering and filing the necessary legal and financial records can be impossible in the weeks after a hurricane.

Gulf Coast residents are scattered across the region in temporary housing, having lost their records when their homes and businesses were wrecked. Many law firms and courthouses also are damaged or destroyed.

"We are so far from normal right now," Botes said.

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(Cheves reports for the Lexington Herald-Leader. Frazier of The Charlotte Observer reported from Baton Rouge.)

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Under the new bankruptcy law, which President Bush signed in April, debtors who earn more than the median income in their state—and who can repay at least $6,000 over five years—no longer will be able to file under Chapter 7, which allows people to wipe out their debts after they forfeit their assets.

Instead, they will have to file under the stricter Chapter 13, which requires a debt-repayment schedule and, under the new law, court-supervised financial counseling. Debtors also will have to produce more detailed records revealing their financial situation in recent months.

The new bankruptcy law includes some exemptions for people suffering catastrophic health problems or serving in the military, but Congress rejected a request to include an exemption for natural disasters.

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(c) 2005, Knight Ridder/Tribune Information Services.

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