Small Business Reading Room

Thursday, May 05, 2005

How the New Bankruptcy Law Could Effect Small Business Entities

Last month, after years of debating, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act. What does this mean for your small business?

Experts seem to feel that this is a win/lose situation for business and entrepreneurs.

I found an article on in the small business section of FORTUNE online by Louise Witt that discusses this very issue.

In the win column we have the following:

  • Small business owners will find it easier to collect debts from other businesses that have filed for bankruptcy protection.

Under the old laws, small business owners that provided goods or services to a company that went belly-up were often considered unsecured creditors, which put them at the back of the line when it came to being reimbursed.

  • Small business owners will find it easier to collect debts from consumers.

The new law will make it harder for individuals to file for Chapter 7 bankruptcy protection, and instead will require consumer to file for Chapter 13 which requires them to participate in a payment plan over a 5 year period.

The bottom line that as a small business owner if you are a creditor, you are more likely to not be left holding the bag, and the new law is something to applaud.

In the lose column you have to consider this:
  • Businesses will face tougher rules when filing for bankruptcy themselves

The law's new small-business provisions have additional paperwork and reporting requirements, making an already difficult situation more burdensome.

  • Sole proprietors may be forced to file bankruptcy protection as an individual

Under the new law, a Judge may consider if most of the debit is personal rather than business related. This on top of the fact that a sole proprietor does not enjoy the same separation of personal assets from business debts as an incorporated entity spells trouble.

Ultimately, if as a small business you are a debtor seeking bankruptcy protection, it could be harder to reorganize under Chapter 11 and work our payment plans. Instead, they may be forced into Chapter 7 where their assets can be sold off to pay creditors.

So, the million dollar question- Are the new bankruptcy laws good new or bad news for small businesses?

I guess it depends on which hat you are wearing at the time- creditor or debtor.



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