New Bankruptcy Law Will Inadvertently Deliver Yet
Another Blow to Katrina Victims

By Michael S. Greco, President,
 American Bar Association

Like all Americans, our hearts here at the American Bar Association have gone out to hurricane victims in recent weeks.  Through our Task Force on Hurricane Katrina, the ABA is helping to provide free legal services to those without means who have been displaced, lost their jobs, loved ones, and their lives as they had known them. We are working to assist victims with every conceivable legal need.

But when the new bankruptcy law takes effect on Oct. 17, our efforts, and the rights of hurricane victims, will be significantly undermined. 

The new law, known as the “Bankruptcy Abuse Prevention and Consumer Protection Act,” makes sweeping changes to the federal bankruptcy code.  While the ABA took no position on the overall legislation, it supported certain useful provisions in the measure.

But the law contains other provisions that may inadvertently hinder people from getting access to legal representation – including those who are trying to reconstruct their lives after the devastation of Hurricane Katrina, many of whom will face a mountain of bills and perhaps no immediate source of income as they try to get back on their feet.

Despite responsible financial habits before Katrina, they may be forced to declare bankruptcy.  And when faced with this difficult decision, they will turn to lawyers to help guide them through the process.  

But for the many lawyers who want to volunteer their time on cases such as this, the new law creates serious obstacles.  That is because the new bankruptcy law requires debtors’ lawyers, even those acting pro bono, to “certify” the accuracy of the schedules listing the debtor’s assets and liabilities as well as the debtor’s ability to make future payments under reaffirmation agreements, in which a debtor chooses to renew a particular debt—such as for a car or house—in order to keep the property.

Before certifying a debtor’s schedules, lawyers will have to conduct a costly investigation—and perhaps even hire private detectives and appraisers—in order to compile all the necessary information.  Similarly, before certifying a reaffirmation agreement, the lawyer will have to conduct a costly audit of the debtor’s finances.  Both certification requirements will require substantial time and money; so much so, in fact, that it may simply not be feasible for a lawyer to assist someone suffering through no fault of their own in such instances as a natural disaster.

Any lawyer willing to assume these costly new obligations and investigate—and then certify—the client’s financial information would be faced with difficult challenges even under normal circumstances.  Following Hurricane Katrina, however, this burden could be insurmountable.  This is because in many instances none of the debtor’s documentation will be available:  banks are gone, personal papers have been washed away, places of employment may still be under water and human resources documents no longer available.

But if lawyers are unable to conduct these investigations, they could be held personally liable for not discovering that a client was lying about his or her financial circumstances in the bankruptcy case. 

The ABA is not suggesting that there should be no repercussions for false filings in these cases. 

But placing the burden of investigating and certifying bankruptcy schedules and the future ability to pay under reaffirmation agreements on the lawyer rather than on the debtor is unfair and counterproductive.  And to place the burden on those lawyers who are otherwise willing to provide free legal advice and counsel to the poorest Americans and to victims of natural disasters is sure to be discouraging to the many lawyers who have volunteered to help the victims of this tragedy.

The U.S. Congress is in the process of considering whether to make technical corrections to the bankruptcy law before it takes effect on October 17.  The need and opportunity to change the law thus are both immediate and pressing.  Please join the American Bar Association in urging Congress to reverse the bankruptcy attorney liability provisions in the new law, so that essential bankruptcy legal services will continue to be available to the victims of Hurricane Katrina and others throughout the country who desperately need them.