Sept. 12 (Bloomberg) -- U.S. Senate Republican leaders said they would be willing to aid Hurricane Katrina survivors by making minor modifications to a new bankruptcy law as Democrats press for more fundamental changes.

Kentucky Senator Mitch McConnell, the No. 2 Republican, said the law, which is designed to make it harder for consumers to avoid repaying credit card and other unsecured loans by filing for bankruptcy, could be modified to help the storm's victims.

``We're open to considering any highly targeted fixes that would make their recovery easier,'' McConnell said in an interview.

Senate Finance Chairman Charles Grassley, an Iowa Republican, said delaying or overhauling the law, which starts taking effect on Oct. 17, wouldn't be necessary.

``The new bankruptcy law already allows bankruptcy courts significant flexibility to look at the special circumstances surrounding an individual's financial situation,'' Grassley said. ``But I want to make sure that there are no unintended results.''

Senator Russell Feingold of Wisconsin and other Democrats last week introduced legislation that would provide a one-year grace period from the law, which would impose an income limit on those seeking bankruptcy protections. Democrats have said the means test would prevent many Americans with legitimate debt problems from regaining their financial footing.

``Bankruptcy lets them get a fresh start,'' Feingold said in a speech on the Senate floor on Sept. 8. ``And a fresh start is what so many of the relief efforts going on are all about.''

FEMA Payments

Feingold's legislation would prevent payments made by the Federal Emergency Management Agency from being counted as income and allow any spending resulting from the storm and its aftermath to be treated as legitimate expenses.

The Consumer Federation of America and the National Association of Consumer Bankruptcy Attorneys are trying to pressure Congress to delay enacting the law for the hurricane victims.

Under the law, which Congress approved earlier this year, many consumers with family income above the median in their state would no longer be able to cancel their debts under Chapter 7 of the bankruptcy code. Instead, they would have to file under Chapter 13, which requires repayment of some or all debts.

The legislation became law after years of rising personal bankruptcy filings in the U.S., and after seven years of lobbying by credit-card issuers such as New York-based JPMorgan Chase & Co and London-based HSBC Holdings Plc.

Banks

U.S. banks have been charging off more consumer loans in recent years after consumers stopped repaying or had their debts discharged through bankruptcy proceedings. The top 25 largest U.S. banks charged off $19.3 billion in loans in 2000, according to SNL Financial in Charlottesville, Va., a banking industry consulting firm. That grew to $27.5 billion in 2003, SNL data show.

In 2003, Citigroup led the pack with $7.5 billion in charged- off consumer loans, followed by Charlotte, North Carolina-based Bank of America Corp., with $2.3 billion, according to SNL data. JPMorgan was next, with $1.6 billion.

Scott Talbott, director of tax policy at the Washington-based Financial Services Roundtable said the industry ``would support and consider'' efforts to exempt Katrina survivors from the law. He said the industry already is making efforts to assist Gulf Coast customers affected by the storm who can't get credit card statements or new cards.

To contact the reporters on this story: Jeff Bliss in Washington a jbliss@bloomberg.net and Laura Litvan in Washington at llitvan@bloomberg.net

Last Updated: September 12, 2005 12:18 EDT