The Financial Storm After the Hurricanes
While the public's attention has focused on the physical recovery from Katrina and Rita, a third storm looms that will prove as devastating to the finances of Gulf Coast residents as the hurricanes: debt and federal bankruptcy reform.
Tens of thousands of Americans living in the region have lost their homes, cars and jobs. If federal predictions are correct, it will be months before evacuees can return home. In Katrina's wake, some 400,000 jobs have been lost, and Rita will only increase these numbers. The unemployment rates for the affected regions of Alabama, Louisiana, Mississippi and Texas will hover in double digits for the foreseeable future.
During the months necessary for economic stabilization, thousands of Gulf Coast residents will be without a paycheck. For some, savings will deplete within a month or two. Others never had any. While incomes plummet, bills pile up: car payments are due regardless of the operability of the vehicle; medical bills, credit card debt, car loans, mortgages and student loans have to be repaid.
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. Many of the victims fell into that camp even before the hurricane. The federal bankruptcy reform is on a collision course with those left behind.
Evacuees will be eligible for disaster assistance, but such aid will be inadequate to protect them from bankruptcy reform scheduled to strike on October 17. FEMA has promised each evacuee household $2,000, which will hardly cover the expenses of hotel rooms, food and other necessities, let alone mounting loan payments. Some will be eligible for Disaster Unemployment Assistance, but beneficiaries will receive 50 to 70 percent of their weekly salary for only 26 weeks. Private charities, especially the Red Cross, will also assist victims, but such assistance is short-term and often capricious.
Apart from encouraging support for the Red Cross, credit card companies and other lenders have made only modest attempts to help Katrina's victims. Banks and credit card companies like MBNA, Chase, Bank One and Bank of America are giving hurricane victims a two- to three-month payment holiday, plus a break from cash advance and late fees. They are also promising not to file negative credit reports for 90 days. Ford and Chrysler are following suit. However, interest on loans will continue to accrue and providing 60-90 days of relief is a short-term fix for what will be a long-term financial problem.
There will undoubtedly be a credit crisis of major proportions on the Gulf Coast and government and lenders must step up to the plate. For one, Congress should revisit the federal bankruptcy law scheduled to take effect next month. Gulf Coast residents were let down once by the government. It is now time to make amends. Defenders of the bill say it has left provisions for survivors, but the bill clearly puts the burden of proof on those in debt. For those who have lost their homes, providing their financial records will be extremely difficult, and hiring a lawyer for the lengthier process may be beyond their means.
For their part, credit card companies and other lenders should institute a longer moratorium on debt repayment, during which time no additional interest or penalty fees would accrue. The moratorium would apply to credit cards, car loans, student loans and mortgages. This moratorium could be implemented on a case-by-case basis and exclude those able to repay their debt.
The failure to enact significant reforms will sabotage efforts by hurricane victims to rebuild their lives, and with poor credit scores, they will find it impossible to secure mortgages and car loans. Just as with Katrina, minorities will bear the brunt of this financial storm. According to the Federal Reserve, more than one-fourth of high-interest, sub-prime mortgages went to African Americans, contributing to their disproportionately high incidence of bankruptcy.
Natural disasters on the scale of Katrina offer an opportunity to reconsider how the nation manages its public responsibilities. Money spent on financing debts will be money not spent on education, job training, starting small businesses and other investments that can help the Gulf Coast rebuild itself. Hurricane survivors face a daunting-enough future without further impeding their efforts to rebuild their lives by imposing punitive bankruptcy reform coupled with the inflexibility of credit card companies and other lenders.