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The New Bankruptcy Law Will Increase Risk for Entrepreneurs

Bankruptcy has always carried with it a stiff punishment. Basically, for seven years you would carry the "Scarlett Letter" on your forehead warning the world that you had stumbled financially.

Starting in October, 2005 the punishment is about to become much harsher.

Three times in the last eight years, pro-business bankruptcy "reform" legislation has been on the brink of becoming law, only to be defeated at the last minute by the Senate. This time, it's made it over the brink. With its passage in the Senate a done deal, there is no further obstacle to the law being signed by President Bush -- expected sometime after Easter.

This means that sometime around October 1st (depending on the date the law is signed), bankruptcy law will instantly undergo its biggest change in since 1978. (Until then, the old law is still in effect.) The legislation prohibits some people from filing for bankruptcy altogether. For those who manage to qualify for bankruptcy, it makes it harder to come up with manageable repayment plans and it has fewer protections from collection efforts than prior law.

The credit industry says changes are needed because the increasing number of personal bankruptcies -- around 1.5 million in 2003, up from about 700,000 in 1990 -- is costing them too much money.

Senator Kennedy estimates the new law will net the credit card industry about $5 billion. Even without the new law, the credit card industry continues to post record profits -- more than $31 billion in profits in 2004 -- 50% higher than it was in 2002. Opponents of the legislation also say the credit card companies bring their problems on themselves by sending out billions of solicitations each year for high-interest credit cards and encouraging consumers to run up high debts.

Who Files for Bankruptcy?

The vast majority of bankruptcy filers are not wealthy individuals trying to cheat the system. According to a 1999 study by federal bankruptcy judges, the average person filing for bankruptcy earns just $22,000 per year. Most have suffered a significant period of unemployment before filing. According to a report by Consumers Union, 85% of elderly debtors cite medical or job problems as the reason for bankruptcy. Consumers Union also says that single moms trying to make ends meet make up a large portion of bankruptcy filers. They note that "a divorced women is 300% more likely to find herself in bankruptcy than a married or single woman, and a divorced woman raising children and trying to collect child support is 500% more likely to end up in bankruptcy."

In addition, a recent Harvard study reported that half of all bankruptcies are triggered by sudden uninsured medical expenses. (Information is also available from the author's appearance before the Senate Judiciary Committee.)

If the new legislation is passed by this Congress, the changes will be devastating to many people who find themselves out of work, ill, or injured, and over their head in debt.

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