Hurricanes and Bankruptcy Reform Pushing More Americans Toward Financial Ruin

By James Donahue

Sept. 30, 2005

It is easy to see the financial crisis confronting the tens of thousands of Americans that were caught up by Hurricanes Katrina and Rita. They have lost their homes, cars and jobs. They are literally on the street without any means of support except for help they receive from charities and the federal government.

But there is another problem that awaits not only these people, but millions of other Americans in the weeks the months ahead. This is a massive debt coupled with the federal bankruptcy reform.

The American Bankers Association reported this week that the percentage of credit accounts 30 or more days past due has climbed to an all-time high of 4.81 percent during a period from April to June, and because of high gasoline and fuel prices, is expected to grow even higher as the year progresses.

“The last two quarters have not been pretty,: Jim Chessen, the association’s chief economist said. He blamed not only high gas prices, but said rising interest rates and the fact that fewer people are saving is also playing a role.

“The rise in gas prices is really stretching budgets to the breaking point for some people,” Chessen said in an AP story. “Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations.”

For the next several months, while Gulf Coast residents struggle to get their lives back in some resemblance of order, most will be living without a paycheck. Except for the few business places that are managing to reopen, there is no work.

And while incomes are non-existent, the bills are ever present. Mortgage, automobile, medical, and utility payments are always due in spite of the chaos going on around these people. For the banks and lending institutions it is business as usual.

Thus the temptation will be great to utilize credit cards to the maximum in the faint hope that times will get better next year, and that jobs will return in time to pay off these colossal debts. 

But times may not get better. Those oil rigs off the coast may be more damaged than first reported and the casinos destroyed along the bayou may not be rebuilt if the moralistic Christians throughout the south have anything to say about it. And the charm of New Orleans as a tourist haven may be lost forever.

All it will take is one more big storm to sweep the area late this year or next, and that credit card gamble will be lost.

Then what?

In a recent analysis for the website AlterNet, Howard Karger wrote: “One of the consequences of so many Americans living paycheck to paycheck is their extreme vulnerability during crises. About half of families roll over credit card balances every month, and balances average almost $5,000.

“Last year 1.6 million cardholders declared bankruptcy. To meet their financial obligations, many Americans have refinanced their homes; about 42 percent of new mortgages are refinances, and 77 percent strip equity from homeowners, leaving them with higher monthly payments,” Karger wrote.

He said that many of the victims in the south fell into this situation even before the hurricane. And now “the federal bankruptcy reform is on a collision course with those left behind.”

In an effort to ward off a growing national problem of credit card bankruptcies, Congress last year changed the bankruptcy laws, making it very hard for families to erase their debts. At best, a person can get payments reduced, but the debt is no longer erased at the sweep of a judicial pen.

The new bankruptcy laws ironically go into effect Oct. 17.

Karger said he believes the change is going to create “a credit crisis of major proportions on the Gulf Coast.” He called for government and lenders to “step up to the plate” and do all they can to help.

While it is true, credit card lenders, banks and even automobile loan companies are relaxing payment demands for up to three months for victims, Karger said this is not going to be much help for people left out of work and without homes for a long time.

He calls for Congress to “revisit the federal bankruptcy law” and for credit card companies and other lenders to extend the moratorium on debt repayment.

“The failure to enact significant reforms will sabotage efforts by hurricane victims to rebuild their homes, and with poor credit scores, they will find it impossible to secure mortgages and car loans,” Karger wrote.