An article appears In today’s NY Times (reg. req’d) discussing the government’s plans to overhaul financial assistance for hurricane victims. FEMA will give only $500 under its new rules and directly deal with hotels and landlords to control access free housing. The inevitable fraud that followed FEMA’s relief efforts last year has become the favorite subject of those who want to blame the hurricane victims for living in the path of Hurricane Katrina. What is never discussed is how some relatively simple changes to bankruptcy and credit laws would make life easier for victims of natural disasters.

Last year, I wrote an article that found bankruptcy filing rates tend to go up twelve to thirty-six months after a major hurricane. This article appeared in the Nevada Law Journal, although you can read an earlier draft on SSRN. The data show 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. In addition to the physical and emotional devastation, natural disasters leave people financially distressed as well.

Some simple changes might alleviate a few of the financial problems that natural disasters can cause. For example, after a natural disaster, a victim not only has to find new shelter and transportation but also may be paying off an old house or car that sits under a pile of rubble. In these circumstances, federal law should limit the creditor’s to the value of any insurance recovery. By tying the creditor’s recovery to insurance, the law would create incentives for the creditors to see to it that their debtors had insurance against natural disasters. Other measures would help such as temporary moratoria on debt collections in federally declared natural disaster areas and mediation of debt collection effects. Similar moratoria and mediations played an important role in the farm debt crises of the 1980s. Temporary bans against adverse credit reporting for persons in a natural disaster area would help those affected establish new credit. Immediately after Hurricane Katrine, some lenders flatly refused to extend new credit to anyone in the affected areas, and such natural disaster redlining should be banned. These are just a few ideas and meant to prompt some thinking on the topic.

I am not trying to suggest that credit relief measures should be a substitute for disaster aid. Not everyone has access to credit either before or after a natural disaster. The time has come, however, for a serious discussion on what credit relief measures are appropriate after a natural disaster.