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Rock Bottom

Bankruptcy reform aimed at system abusers might make it impossible for struggling businesses to get out of the hole.

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This story appears in the July 2001 issue of Entrepreneur. Subscribe »

Does the Bankruptcy Reform Act of 2001 herald good news? Well, it sounds promising to small-business creditors. And, yes, it seems like recouping money from deadbeat customers will be easier. However, the big picture it offers entrepreneurs is somewhat gloomier. With the introduction of onerous reporting requirements and tighter time frames for reorganization, the proposed law would likely lower the boom on many struggling businesses that previously could have sought shelter from Chapter 11.

"Any company with liabilities in excess of $3 million will not have to follow the strict guidelines being imposed on small businesses. But small businesses are the companies that can least afford to have more difficult hurdles put in front of them."

Not that advancing the line between struggling and failing was the original intent of the Act. In fact, the bill's proponents say it's really going after wealthy abusers of the system who've managed to jettison their debts while holding on to their expensive homes and other financial assets. According to the American Bankers Association (ABA), the number of consumer bankruptcy filings reached 1.28 million in 1999, nearly 50 percent higher than the figure stood in 1995. The ABA estimates incremental costs to businesses that never regain money that's owed to them have increased expenses for the average American household by $400 per year. "But the bill targets people who use the code fraudulently," says the ABA's Catherine Pulley. "For the majority of Americans, this bill will have no impact at all."

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