Hurricane Hardships Should Be Weighed in Bankruptcy Filings (Corrected)

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

Hardships experienced by victims of hurricanes and other natural disasters should be taken into account if they file for bankruptcy, the Justice Department office overseeing bankruptcy cases said.

The recent policy announcement by the Executive Office for United States Trustees (EOUST) followed hurricanes Harvey and Irma, which hit Texas and Florida respectively. Another, Maria, pounded Puerto Rico Sept. 20 with Category 4 force.

Damages from Harvey and Irma alone could total $300 billion in the Caribbean and the U.S., Joel Myers, founder of AccuWeather Inc. told Bloomberg News. Residents and businesses impacted by those storms are wrestling with a number of serious challenges, from lost loved-ones to technological problems and extended power outages as well as battered or flooded homes and interrupted commerce.

It could be months or even years before bankruptcy petitions are filed.

A memorandum with enforcement guidelines was sent Sept. 14 to U.S. trustees in storm-hit areas. The memo from Clifford J. White III, the trustee’s office director, asks Chapter 7, 12, and 13 trustees, and U.S. trustees in the affected districts to demonstrate “prosecutorial discretion.”

The memorandum covers document requirements, means testing to determine presumption of abuse, attendance at meetings of creditors, credit counseling, small business Chapter 11 bankruptcies, and venue.

The guidelines provide leniency with respect to any reasonable requests for filing or producing documents due to a natural disaster, and urge U.S. Trustees to exercise “prosecutorial discretion” when deciding whether to take action to dismiss a debtor’s case for the delay or inability to obtain a credit counseling certificate before filing.

The Bankruptcy Code requires that individual debtors must undergo credit counseling within six months before they file bankruptcy.

The guidelines also provide that costs or income losses due to rebuilding would be “special circumstances” for purposes of rebutting the presumption of abuse. That would allow more debtors to file Chapter 7 rather than Chapter 13.

The guidelines were developed “to ensure that we administer bankruptcy cases in a manner that takes into account the hardships experienced by victims of hurricanes and other natural disasters,” White said Sept. 14 at the annual convention of the National Association of Bankruptcy Trustees.

The U.S. Trustee Program, which is responsible for overseeing the administration of bankruptcy cases and private trustees, developed policy guidelines in the wake of Hurricane Katrina in 2005.

After Katrina, the program announced a temporary waiver of the credit counseling requirement for bankruptcy filers in storm-ravaged Louisiana and the Southern District of Mississippi. But guidelines for Harvey and Irma merely call for “prosecutorial discretion.”

“Under the enforcement guidelines, prosecutorial discretion may be exercised regardless of whether the conditions are present for a waiver under Bankruptcy Code Section 109(h)(2),” a U.S. Trustee Program spokesperson told Bloomberg BNA Sept. 20.

Is It Enough?

John Rao, an attorney with the National Consumer Law Center in Boston, told Bloomberg BNA Sept. 18. that issuing guidelines was a good step. “But it would have been better if they had gone one step further and issued a waiver like they did with Katrina,” he said.

The difference may be due to the timing of Katrina in relation to when a new bankruptcy law went into effect, Rao said.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which contained the credit counseling requirement, was just taking force and there was a question as to whether there was adequate credit counseling available, he said.

In this case, however, when you consider, that in many hard-hit areas there are power outages and other issues where debtors can’t get to computers to use the Internet for credit counseling, a waiver may have been more effective, Rao said.

“A waiver makes sense, and credit counseling isn’t really going to help at this point for consumers who have severe financial problems and have lost everything through these storms,” he said.

The purpose of the credit counseling requirement is to ensure that “debtors are made aware of any feasible alternatives to bankruptcy, including repayment plans,” White said.

He noted that there are about 120 credit counseling agencies that provide services through 700 walk-in facilities, over the phone, and over the Internet, and that service is reasonable at about $25.

The problem is that there are lots of rural areas and isolated pockets where people may be without power for weeks, Rao said.

Credit counseling may assist some in identifying non-bankruptcy options to resolve their financial turmoil, White said. “Initial reviews comparing the number of petitions to the number of certificates issued indicated that about 10 to 15 percent of debtors seeking a credit counseling certificate do not file bankruptcy, at least not immediately,” he said.

A more balanced consideration of the potential consumer benefits of counseling could be more useful for debtors and creditors, White said.

Edward C. Boltz, a consumer advocate and partner with the Law Office of John T. Orcutt, P.C., Durham, N.C., told Bloomberg BNA Sept. 19, that he believes a temporary waiver wasn’t issued this time due to a general “institutional forgetfulness” of what was done in the past, and a “disregard” for making it easier for people who may have lost everything.

Debtors’ attorneys will still have to file motions in those areas affected by the hurricanes and other natural disasters for temporary waivers, which may or may not be granted, Boltz said.

A blanket waiver such as the one issued after Katrina would have been better, he said.

Boltz blogged about a qualitative study of Chapter 7 debtors on their experiences with, and impressions of, the required debtor education courses in 2014. He found that “the vast majority of the participants … did not find the courses to be of any help to them in their financial lives.”

Lag Time

“Typically, there is a six month to a year lag time following a natural disaster before consumers file bankruptcy,” Rao said.

They deal more with insurance issues, not debt collectors, right after a natural disaster, especially in areas like Houston that had significant flooding and many people lack flood insurance, he said.

After they can’t get the pieces of their life back together, consumers may file bankruptcy, Rao said. Most people file bankruptcy “as a last resort,” he said.

It is beneficial for debtors filing bankruptcy after a natural disaster to hire an attorney, Boltz said. Bankruptcy practitioners will know to ask for a waiver based on the enforcement guidelines, he said.

The cases of debtors who file pro se without an attorney will be dismissed if they fail to get the required credit counseling and don’t ask for a waiver, Boltz said.

This guidance is really directed toward attorneys who practice in the area of bankruptcy, Rao said.

The U.S. Trustee Program consists of an Executive Office in Washington and 21 regions with 92 field office locations nationwide.

Correction: An earlier version of this story incorrectly identified Boltz as the author of the qualitative study of Chapter 7 debtors.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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