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Bankruptcy Law

The bankruptcy law has major implications for entrepreneurial activity. A joint study conducted by John Armour of the University of Cambridge and Douglas Cumming of the Rensselaer Polytechnic Institute established a close relationship between the bankruptcy law and the entrepreneurial activity. After studying self employment data relating to 15 countries in North America and Europe, Armour and Cumming concluded that the "bankruptcy law has a very pronounced effect on levels of entrepreneurship."

Now most developed countries have realised that a progressive bankruptcy law is essential for boosting entrepreneurial activity. Consequently, governments in developed countries have tried to reduce the stigma attached to bankruptcy by making bankruptcy law less onerous.

Bankruptcy refers to the inability of an individual or an entity to repay debt. In the UK, the term 'insolvency' is applied to companies and 'bankruptcy' to individuals. In some countries, bankruptcy and insolvency are used interchangeably.

Bankruptcy Law in the US

While most developed countries have simplified their bankruptcy law, some countries such as the USA have done the opposite. In October 2005, sweeping changes to the US Bankruptcy Code came into effect. These changes prevent individuals and businesses from misusing the bankruptcy law. Earlier the practice of using chapter 7 filing to shrug off credit card debt was rampant in the USA. The reforms while attempting to cut down the misuse of bankruptcy law, have unwittingly made life difficult for individuals, who are bankrupted by illness or redundancy.

Bankruptcy Law in the UK

Other developed countries such as UK have taken a more considerate view of bankruptcy. In the UK, bankruptcy relates to individuals. The country has made bankruptcy acceptable through changes to the personal bankruptcy law. The personal insolvency provisions of the Enterprise Act 2002 came into effect on April 1st 2004.

The new provisions allow bankrupt persons to emerge from the bankruptcy faster. A person filing for bankruptcy on or after April 1st 2004 is discharged after a maximum period of 12 months as opposed to three to five years earlier. The individuals who have filed for bankruptcy before this date will also be discharged on April 1st 2005 or earlier as prescribed by the court. The individuals, who have previous bankruptcy to their name in the last 15 years in addition to the current one, will be eligible for automatic discharge only on April 1st 2009.

The discharge, however, does not necessarily mean freedom from the entire debt. Creditors, for instance, will be given a legal charge on the interest of the individual in a house for a maximum period of three years as opposed to an open-ended arrangement earlier. Some individuals may be required to repay a part of the debt even after obtaining a discharge. The new provisions also make the misuse of bankruptcy law difficult, imposing restrictions that could be in force for as long as 15 years.

Most individual bankruptcies in England and Wales result from a bankruptcy order secured from a court by either the bankrupt individual or creditors. Other routes to individual bankruptcy include individual voluntary arrangements and deeds of arrangement. Furthermore, the online Individual Insolvency Register maintained by the Insolvency Service provides details of individual bankruptcies.

There has been widespread fear in UK that the reform of the bankruptcy law would lead to a surge in individual bankruptcies. On a quarterly basis, the bankruptcy orders in England and Wales have risen continuously after the bankruptcy law reform. The bankruptcy orders in England and Wales stood at 11,195 in the second quarter of 2005 as compared to 8,779 in the corresponding period of 2004. With consumer indebtedness rising to new levels, individual bankruptcies are inevitable. The bankruptcy law reform, by making bankruptcy acceptable, probably contributed to the rise in bankruptcies. Less visible is the boost to entrepreneurship, which eventually may make the bankruptcy law reform worthwhile.

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