Bankruptcy Bill Needs Reforming

President Bush these days likes to promote his vision of an "ownership society" in which citizens take more control of their lives from the government.

So why is he poised to sign what could be one of the most sweeping anti-ownership laws in years?

I'm speaking of the bankruptcy overhaul bill that is moving rapidly toward becoming law. The bill has been framed as a needed reform to get people to take more responsibility for their personal debts and make it harder to just walk away from them.

But what most people don't realize is that it will hammer entrepreneurs and discourage small business formation, undermining a major pillar of an ownership society.

The proposed law passed the Senate a month ago and will be voted on by the House this week, and the president has indicated he will sign it. Unless some key changes are made, it will greatly increase the penalties for risk taking.

Under current law it is possible for an entrepreneur to take a chance and fail, then have the debts discharged and move on to a fresh start with new financing. But under this bill, an entrepreneur who fails would have those debts hanging over him or her for years, limiting opportunities to raise new capital. And wages could be garnisheed at any job the entrepreneur might take.

The message of this legislation is "don't start your own business," says Rep. Howard L. Berman (D-North Hollywood), a member of the congressional committee that worked on the bill.

The bill, the most dramatic overhaul of the bankruptcy code in 27 years, also would discourage a small company from expanding into a new field "for fear that failure could sink the whole enterprise and cost the owners all their property," says Michelle White, economics professor at UC San Diego and an expert on bankruptcy.

Where did such a bill come from? Mainly from the credit card and banking lobbies, which have sought for years to stem what they describe as a rising tide of individual bankruptcies.

Last year, 1.6 million individuals declared bankruptcy, 1.1 million of them in Chapter 7, which allows discharge of debts and a fresh start. Creditors claim that people are using credit cards recklessly and escaping the consequences.

Consumer groups respond that debt problems are not surprising considering that "pre-approved" cards are distributed freely through the mail to practically anybody with a pulse.