Why the New Bankruptcy Law Will Hurt Small Business

Louise Witt, a columnist at Fortune Small Business, notes that the new U.S. Bankruptcy law has the unintended effect of stifling entrepreneurship:<blockquote>The problem is that some individuals who file for bankruptcy run into financial problems, because they were attempting to start businesses, says Robert Litan, vice president of research and policy at the Kansas City, Mo.-based Ewing Marion Kauffman Foundation, which supports entrepreneurial programs and education. Litan says that many entrepreneurs finance their startups by maxing out their personal credit cards as well as taking out mortgages or equity lines of credit on their homes. “Not an insignificant number of people who have excess debt also happen to be entrepreneurs,” he says.

Jay L. Westbrook, a business law professor at the University of Texas School of Law in Austin, says that over the 20 years he’s studied personal bankruptcy filings, he’s found that 10% to 20% of them were actually business bankruptcies. Unfortunately, the new bankruptcy law, which goes into effect on October 17, doesn’t acknowledge that some individuals rack up debt not because they’re irresponsible, profligate spenders, but because they’re entrepreneurs, says Westbrook. “It doesn’t divide so neatly into consumer and business bankruptcies,” he says. “It’s just not the Enrons of the world and the Jay Westbrooks. In the middle, there are hundreds of thousands of others who go into bankruptcy starting their own businesses.”</blockquote>If you are using credit cards to finance your new business, try to cut back and look for other ways to finance it.

Credit cards are an especially slippery slope because the debt can mount up without realizing it. If you are having automatic payments charged to your credit card, you may not realize how much you are racking up in debt before it become insurmountable.