We all remember the horrifying images of physical destruction that emerged in the wake of Katrina a year ago. How could we not? Pictures of shattered homes and displaced millions flooded the airwaves back then, and they surely will again now that the anniversary of the monster storm is upon us.
But it's also worth remembering the economic destruction wrought by Katrina. Thousands of companies were affected, including casino operators such as MGM MIRAGE
And what of those displaced millions? How much debt do they now owe? How many remain unemployed? Bankruptcy is a very real possibility for far too many. At least, that's the conclusion of ironically named Robert Lawless, a lawyer and University of Illinois law professor. He performed a study which found that states directly affected by a major hurricane such as Katrina endure as much as 50% more bankruptcy filings than their unaffected peers.
Sandbags and supplies
That's a frightening stat, especially now that Hurricane Ernesto has torn through Haiti and is threatening the Gulf Coast. But Ernesto could be just the beginning of a busy hurricane season. In April, the Department of Atmospheric Science at Colorado State University estimated that 17 named storms would throttle America's Gulf and Atlantic coastlines this season.
Fortunately, that pales with 2005; Katrina was one of 27 named storms (of which 15 became hurricanes) that spawned in the Atlantic. The bad news is that a typical year boasts only 10, so there's plenty of reason for folks along the eastern seaboard and the Gulf Coast to remain wary ...
When you can't be a Boy Scout
And fiscally, to be prepared. If Katrina's younger sister comes calling, she's likely to bring with her an equal amount of human devastation. For those who survive, the elimination of basic infrastructure will destroy jobs and cut off income, leaving strapped consumers struggling for assistance.
Obviously, the best preparation for such an event is a well-funded emergency account that's accessible from anywhere. A high-yield savings account from an online bank or a credit union may be your best option.
But that's only if you have the disposable income to squirrel away a meaningful cash hoard. Few of us do, and that includes those who suffered most at the winds of Katrina. Indeed, the ugly truth is that too many Americans are economically vulnerable and would need to subsist on credit and government handouts in the wake of a disaster.
Fortunately, good options exist. Here are three:
- Get a loan. Those with decent credit may be able to get a low-interest loan from their credit card issuer. Citigroup has provided many such deals in the past and still does today. The drawback is that your creditor may require that you upgrade your card and accept an annual fee. Still, that could be a small price to pay in a pinch.
- Ask your card company for help. Some card companies will extend special services to disaster victims. "Someone who is a victim of a catastrophe and [who] needs additional credit on an existing account to get by ... can ask to be placed on 'temporary hardship status'," says Andrew Housser, co-founder and CEO of financial portal Bills.com. Hardship status, says Housser, may entitle cardholders to lower interest rates and a moratorium on over-limit and late fees. Some credit issuers may even take the extraordinary step of allowing cardholders to skip a payment.
- Try the Feds. Despite troubling reports following Katrina, the Federal Emergency Management Agency (FEMA) can be a good source for financial assistance. FEMA offers two types of loans: for rebuilding property and for personal living needs. Both are good deals, but you won't receive cash quickly: FEMA requires that you first tap into insurance and other potential funding sources before asking FEMA for assistance. Oddly, that list includes the Small Business Administration, which has its own disaster relief program. Do yourself a favor and apply with both agencies if you've been a victim.
Also, be prepared to answer lots and lots of questions as you seek aid. Neither your credit issuer nor the Feds are likely to be in a hurry to deliver handouts. Only by having relevant documents and account numbers on hand may you speed the process, advises Housser.
Time to call it quits
Finally, let's talk about your last resort: bankruptcy. It's a rotten option for many. Why? It's a hassle and it ruins your credit. For example, last year Congress made it harder to earn a bailout by applying a "means test" to your income. The test contains several nuances, but a good rule of thumb is that you'll be ineligible for Chapter 7 bankruptcy -- which usually wipes out unsecured debt -- if your gross income is above the median annual income for the state in which you live.
Chapter 13 bankruptcy remains an option for many of those who don't qualify for Chapter 7. But even then, says Housser, mandated repayment terms under Chapter 13 are usually less favorable than other debt-reducing strategies. Meanwhile, a bankruptcy filing will leave an ugly black mark on your credit report for 10 years.
What's more, consumers must apply for credit counseling within six months of filing for bankruptcy. Credit counseling is designed to help consumers figure out strategies for reducing debt without asking for a bailout. It's a good idea, in theory. Sadly, the industry has been tarred by a three-year IRS audit that found significant abuses.
That may be why Housser says debt resolution is the best option for those who can't obtain a Chapter 7 ruling. What is it? Debt resolution entails hiring a firm to negotiate better repayment terms on your behalf. Sometimes, Housser says, the results can be dramatic, with principal balances cut by as much as 50%. In return, you pay the firm a percentage of the savings obtained. The downside? Strong-arm tactics won't go over well with creditors who are likely to downgrade your credit rating (though not nearly as much as they would under a bankruptcy filing).
Follow the money
It's been a year since Katrina roared through the Gulf Coast, leaving death and devastation in her wake. My fear is that her ugly younger sister will visit soon and destroy yet more lives. If you live in an at-risk region, please promise me that you'll call you credit card issuer to ask about short-term loans, download assistance forms from FEMA and the SBA, and keep documents and account numbers in a safe place. Only then will you be as fiscally prepared as you can be when Mother Nature gets in a bad mood. And in the meantime, stay safe, Fool.
Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new money management service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Click here to learn more.
For more Katrina coverage:
- Katrina's Winners and Losers
- Don't Forget Mississippi
- Back in Business, Better Than Before
- Great Stocks Under Rocks
- Live, From New Orleans
Fool contributor Tim Beyers saw FEMA at work during the Northridge earthquake of 1994. That memory makes him happy to no longer live in California. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking his Fool profile. The Motley Fool's disclosure policy is like a calm ocean breeze.