Is Bankruptcy Law Bad for Entrepreneurship?

An article at Knowledge@Emory raises an interesting possibility. They question whether the newly passed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may dampen our entrepreneurial economy. Why? Because so many entrepreneurs use personal credit cards and second mortgages on their homes to finance start-ups. For these entrepreneurs, easy bankruptcy provides a safety net if things don’t go right.
When I teach entrepreneurs and potential entrepreneurs I try to push them to think about start-ups in a prudent and responsible way. Success and failure will both have consequences, so they need to think things through very carefully. I am much less concerned with how many of them start-up a business as I am with how many of them still are operating their businesses three, five, even ten years from when I have them in class. Those businesses that do last over time are my measure of the success of what I do, not the volume of those who do any old start-up.
I want them a little afraid at their start-up. I want them a little nervous. I want them a little worried about what happens if they fail. Entrepreneurs who rush in blindly like marauding pirates have not learned the lessons we try to teach them in our classes.
When thinking about how easy bankruptcy has become, I recognize what a different time and place that I grew up in. When I was young bankruptcy brought a certain shame if it was self-inflicted. Certainly some folks ended up at this point through events outside of their control, and for them we all felt pity. But, if someone was reckless in jumping head first into a business deal that was full of risk with only a small chance of success, there was not pity except for his family who had to endure the consequences of his failure and the resulting bankruptcy. Some spent years slowly and quietly paying of debts from deals gone sour just so they could avoid the stigma of self-inflicted bankruptcy. They were good people who understood that they had a responsibility to fulfill. The Corporate wall of protection was rarely used as a shield from personal responsibility for a business that failed.
Now just like marriage, we encourage people to jump into business with the knowledge that there is an easy way out. We don’t get along? No problem, we can just get a quick divorce. Business doesn’t make it? No problem, bankruptcy can protect us from most of the consequences.
To me this now means that socialistic thinking has crept into two of the most important foundations of this society: marriage and private enterprise. We now can jump into a marriage or a business deal knowing that there is an easy exit, limited consequences, and a great big government with all kinds of programs and laws to protect us and make it all better.
If Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 causes folks to think twice about their business idea, that to me is a good thing. If one of their main exit strategies is a quick and easy bankruptcy, then I want them to either rethink their plan or start over. Or if they are one of my students, plan to take the class again next semester.
(Thanks to Jennie Bowman for passing this article along to me).