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In Defense of Chapter 7

Sensing that the system is being abused, Congress passed a bill in March to help creditors recover more debt from businesses that have filed bankruptcy.
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Entrepreneurs believe that when you borrow money, you ought to pay it back. But it doesn't always work that way. More than a million Americans and more than 20,000 businesses euphemistically "obtained relief" from creditors by filing for Chapter 7 in 2004.

Sensing that the system is being abused, Congress passed a bill in March to help creditors recover more debt. A survey of attendees at the recent Inc. 500 conference (see story at right) found that support for the reform stood at 53%.

But some observers urge caution. Harvard law professor Elizabeth Warren, a bankruptcy expert, has long argued that America's entrepreneurial spirit is embedded in the concept that we, as a society, treat risk takers charitably when they fail. Reweighting the system in favor of creditors could diminish that spirit, she warns.

Nonsense you say? True, the next Bill Gates is unlikely to let the possibility of failure deter him from building a company. But suppose his first company fails. "Many successful entrepreneurs suffered failures before they made it big," Warren notes. "They learned, they paid what they could, and they tried again. This bill is designed to make it much harder to try again."

Warren also criticizes Congress for rejecting an effort to deal less harshly with medical-related bankruptcies. Minus that provision, young people may be burdened with debt that their ailing parents cannot repay, she says. That money might otherwise be used as start-up capital.

Last updated: May 1, 2005




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