Law Provides Bankruptcy Relief for Hurricane Victims

WASHINGTON – People filing for bankruptcy who were affected by Hurricanes Katrina and Rita will get some leeway in meeting requirements of a strict new law.

The Justice Department's U.S. Trustee Program announced the action on Wednesday, a day after the department temporarily waived for hurricane victims the law's requirement that people filing for bankruptcy get credit counseling first. The new guidelines "take into account the hardships experienced by victims" of the Gulf Coast (search) hurricanes, the program said.

Some Democratic lawmakers and consumer advocates have said that the new law, which takes effect Oct. 17, will produce hardships for hurricane victims. The changes, which make it harder to erase credit card and other debt through bankruptcy, are the most sweeping in a quarter century and will affect an estimated 30,000 to 210,000 people annually.

A Justice Department official told Rep. James Sensenbrenner (search), R-Wis., chairman of the House Judiciary Committee, in a letter Wednesday that the Trustee Program has directed its bankruptcy administrators in the field to exercise "appropriate restraint and discretion favorable to hurricane victims" in some of the law's requirements.

Sensenbrenner opposes legislation put forward by Democratic lawmakers that would provide a one-year grace period after Oct. 17 for people affected by the hurricane to file under the more lenient current bankruptcy law.

The requirements at issue in the Justice Department action include the core change made by the new law, an income test for determining whether people can have their debts canceled in exchange for forfeiting certain assets or if they must repay them under a court-ordered plan.

The bankruptcy trustees, who administer the law around the country and make decisions on individuals' applications, are being told to consider lost income, increased expenses and other items resulting from the hurricane to be "special circumstances" to be taken into account in the means test. Some relief also is to be given hurricane victims in producing documents and attending public meetings with bankruptcy trustees.