Bankruptcy in the Wake of Katrina

katrina.jpgI’ve recently been thinking about the difficulty researchers will face in studying Hurricane Katrina’s effects on bankruptcy filing rates in New Orleans. A couple of weeks ago, over at Credit Slips, Bob Lawless (University of Illinois) discussed the importance of extending credit relief to natural-disaster victims. Lawless’s empirical work on bankruptcy filing rates after a major hurricane has found “that for every two new bankruptcies that occur in areas unaffected by the hurricane, there are three new bankruptcies in the judicial district where the hurricane made landfall.” The study focused on hurricanes from 1980 – 2004, so I’m curious to see whether in the case of Katrina this finding will hold to be true for the Eastern District of Louisiana (E.D. La.), within which New Orleans is located. My hunch is that it won’t. Since the New Orleans diaspora involved hundreds of thousands of individuals, many of whom would be likely candidates for bankruptcy but have not returned (and may never return) to the city, the increased volume of bankruptcy filings will not materialize in E.D. La. A preliminary look at recent bankruptcy-filing data from the district suggests as much.

As an initial matter, there has recently been a national downward trend in bankruptcy filings. According to statistics from the Administrative Office of the U.S. Courts, bankruptcy filings for the second quarter of Fiscal Year 2006 (1/1/06-3/31/06) were down approximately 71% nationwide compared to the second quarter of FY 2005. This dramatic downturn has been attributed to the deluge of bankruptcy filings prior to October 17, 2005—the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which was intended to make it more difficult for certain consumer debtors to obtain bankruptcy relief. However, bankruptcy filings for E.D. La. had dropped approximately 86% for the same period of time—15% more than the nationwide figure. In terms of absolute numbers, there were only 340 total bankruptcy filings (60 business and 280 consumer) within the district.

It strikes me that these figures, in addition to being a product of strategic behavior by debtors in anticipation of BAPCA, also reflect the fact that the majority of individuals who have returned to New Orleans probably have had the financial means to stave off a bankruptcy filing. On the other hand, many of the New Orleans evacuees who remain away from the city have probably lost much (if not all) and either (1) have less of an incentive to return or (2) do not have the financial means to return. It’s these individuals whom researchers will have to track down—in places like Houston, Birmingham, Atlanta and Nashville—in order to understand fully the effects of Hurricane Katrina on financial distress. Moreover, any comprehensive study will have to analyze the impact of the diaspora on the communities where New Orleans residents relocated. The economies of these communities will simultaneously have experienced financial gain (e.g., influx of consumer dollars, workforce expansion) and financial strain (e.g., increased demands on public services such as health care and education). Considering the latter, it could very well be the case that financial distress leading to bankruptcy will be experienced by individuals in communities that were not directly in the path of Hurricane Katrina. If the numbers are large enough, the Katrina experience could force us to reconsider our prior understandings of a natural disaster’s impact on bankruptcy filing rates.

You may also like...

3 Responses

  1. The lack of a significant number of new bankruptcy filings in the ED of La. may hold true for consumer cases. But commercial concerns are a different story. They generally are not part of the diaspora, for any number of reasons. They will be buffeted over the coming months with increases locally in taxes, insurance premiums and utility rates, and with increased borrowing costs as a result of national trends. Due to a smaller population base in the New Orleans metropolitan area, many businesses will see much reduced income year over year. The increase in expenses and the decrease in revenues for many businesses likely will cause increased chapter 11 activity in the coming months, especially once the insurance and government monies dry up.

  2. Rafael Pardo says:

    Rudy – For the reasons you set forth, I too suspect that the impact of Katrina on businesses located in the E.D. La. will result in an increase in Chapter 11 filings. That said, I don’t think it’s accurate to say that commercial concerns “generally are not part of the diaspora.” In “The Myth of the Disappearing Business Bankruptcy,” 93 Cal. L. Rev. 745 (2005), Elizabeth Warren and Bob Lawless document how the AO statistics for business bankruptcy filings significantly undercount business bankruptcies. Specifically, the AO classifies the bankruptcy filings of many entrepreneurs, self-employed individuals and independent contractors whose undertakings have failed as nonbusiness filings. For example, Warren and Lawless found that 19.5% of Chapter 7 and Chapter 13 cases that were classified as nonbusiness filings showed evidence of a connection to an underlying business. If we pay attention to this class of individual in future studies, I suspect a sizable number of businesses in the E.D. La. will have experienced the diaspora effects I previously mentioned.

  3. Nick says:

    While we are on the subject of bankrupcty, it will be interesting to see how this entire sub-prime mortgage lending mess will shake-out in 2008 and 2009. Will Congress act to help-out those Wall Street firms that should have simply known better than to loan money to people that can’t afford to repay it? It should make for an interesting year!