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Let’s return rewards to risk takers

Marketplace Staff Jul 9, 2007

Let’s return rewards to risk takers

Marketplace Staff Jul 9, 2007


Bob Moon: American business is known for its risk-taking. High risk, high reward. But, in some cases, big failure.

In the past, there was a wide safety net for individual Americans. They could file for bankruptcy protection under something called Chapter 7, which protected personal assets. Then, the government toughened the rules, and now fewer entrepreneurs are able to shield themselves under Chapter 7.

Commentator Aparna Mathur says bad move.

Aparna Mathur: Bill Gates and Michael Dell started out small, operating out of garages and dorm rooms with only an idea to carry them forward.

Inspired by success stories like these, every year millions of new businesses start. But nearly half of them fail in the first five years. If entrepreneurs know that even if the business fails, their homes and personal assets will be protected, this encourages them to take additional risks.

Henry Ford struck gold with his car company, but only after filing for bankruptcy twice. Far more recently, six years ago, California entrepreneur Scott Smith was forced to file for personal bankruptcy. His fault? He used the word “entrepreneur” in his company name.

A small business magazine, Entrepreneur Media, had already trademarked the word and sued for $1.5 million. But at that time, under the law, Smith had the right to protect his assets. It was a fresh start with the slate wiped clean.

Today, if Smith wanted to file for Chapter 7 bankruptcy, his personal assets would be at stake. That’s because under toughened rules, people have to take a means test. And if they earn more than the median income in their state, they’re barred from filing for Chapter 7.

Instead, he’d most likely file for Chapter 13 — a form of bankruptcy that involves reorganization and provides no protection to personal property. That means long repayment periods and no fresh start.

My own research shows that the effect of stricter rules is reducing the number of business start-ups. The American system used to provide entrepreneurs a chance to get back on their feet and to shut down a business if it wasn’t doing well.

That was one reason America was widely viewed as the most entrepreneurial country in the world. Let’s return the rewards to those risk-takers.

Moon: Aparna Mathur is a research fellow at the American Enterprise Institute.

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