Bankruptcy Law And Entrepreneurship – Which Is The Chicken, Which The Egg?

January 30, 2008 7:02 am Published by

There’s an ongoing discussion about whether there is a link between how strict or lenient the bankruptcy laws are in a country and how entrepreneurial the culture is in that country.  Some theorists say that where there are more small entrepreneurial businesses, there are likely to be more bankruptcies.  The opposite theory is that, in countries that have less forgiving bankruptcy rules, entrepreneurs are more reluctant to start businesses for fear that a bankruptcy would ruin them for good.  So, which is the cause and which the effect, which the chicken and which the egg?

By way of some history, in Germany there was no “fresh start” through bankruptcy available for business owners at all until 1999.  Today it takes six years for a debtor to receive a discharge in that country.  In neighboring Belgium, they’ve allowed a fresh start since 1998, and a debtor can receive an immediate discharge of debts with the permission of the court.  In Italy, the situation was even harsher.  Until 2006, a debtor who had filed bankruptcy had his or her passport seized and couldn’t travel!

In general, the U.S. is perceived as a very liberal country in terms of its bankruptcy laws. (Our country was actually founded by debtors who had been released from England’s debtor’s prisons!)  Studies appear to validate the theory that liberal bankruptcy laws are the cause, rather than the effect, because it appears that in the good ol’ USA, there is a greater willingness on the part of individuals to establish their own businesses. 

That idea is borne out when we look at differences between states.  For example, the homestead exemption varies from state to state.  Where the exemption is more liberal, self-employment statistics show a greater incidence of people that own their own business as opposed to working for someone else. 

As a bankruptcy attorney in Indiana these many years, and as someone who was instrumental in writing the bankruptcy law updates here,  all these studies merely bear out what I already knew.  It’s the bankruptcy law that’s the chicken, and the entrepreneurial enterprises that are the eggs.  In other words, establishing a system that allows a fresh start means there will be more people willing to make that first start at owning their own business.
 

 

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This post was written by Mark Zuckerberg

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