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New bankruptcy laws and entrepreneurship

On October 17, the Bankruptcy Abuse Prevention and Consumer Protection Act will make the use of bankruptcy as a way to erase debts and create a fresh start much more difficult. Although clearly some people end up bankrupt from poor money management, poor discipline or even bad luck, I do have some concerns about the long-term effect of the new bankruptcy law on entrepreneurship. If you compare the United States (with a rather high rate of business founding to the population) with other countries, such as Japan or Germany with far lower rates, differences in bankruptcy laws stand out very starkly.In both Germany and Japan, debtors have to pay off all or most of their debts and have all their assets (homes, for instance) at risk. Over time, the specter of total personal disaster in the event of a business failure has had the effect of increasing the downside of starting a business. In Japan, for instance, it is not all that uncommon for owners of failed businesses to commit suicide as their only way out of an untenable financial situation.

In the US, in contrast, although entrepreneurs do not generally believe their businesses will fail, there is some comfort in knowing that if worst comes to worst all is not lost on the personal side. By increasing the downside of bankruptcy, the new law makes starting a business less like an “option” and more like a fixed commitment, right from the start. Such a change in incentives is likely to have unforseen consequences, but one that we can probably predict is a chilling effect on willingness to take personal risks on the part of our entrepreneurs.

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