Q: As I understand it, the new bankruptcy laws due to take effect soon may be delayed because Congress wants to allow victims of the hurricanes to file under the old laws. If so, I still have time to file. Is that correct?
Jeff, Mena, Ark.
A: Probably not. Bankruptcy laws are set to change on Oct. 17, and it seems unlikely that Congress is going to delay that date. This is too bad for survivors of Hurricanes Katrina and Rita because they could really use the help under the soon-to-be-old rules.
Even more troubling is that it is hurricane survivors who need help the most. According to a study done by Professor Robert Lawless of the University of Nevada Las Vegas, there is an 11% increase in bankruptcy filings the first year after a hurricane in the affected region, and almost a 30% increase in the second year after a major hurricane.
But, as indicated, despite figures like these, Congress seems unlikely to stall the effective date for the change because the new law allows judges and bankruptcy trustees to make exceptions for people in "special circumstances" and one would assume that victims of devastating hurricanes are indeed in special circumstances.
For everybody else, small business owners especially, the coming changes mean that if you are on the fence, you should probably file sooner rather than later. The old rules allowed for what the bankruptcy code called a "fresh start." Most debt that people have is unsecured debt, and under the old system, unsececured debt was wiped out in a bankruptcy. As discussed below, this will change under the new system.
(A little jargon: Chapter 7 is currently the most common type of bankruptcy for individuals and small businesses. It presently allows all unsecured debts - credit cards, medical bills, etc. - to be completely wiped out, or "discharged." Chapter 13 is a repayment plan paid to the bankruptcy trustee - who then pays your creditors - and last from three to five years.)
Depending upon the type of small business you are, the effect of filing bankruptcy today on your business varies:
Either way, the expert assistance of a bankruptcy lawyer will be needed if you own a business and want to file a bankruptcy either before or after.
October 17. However, if you wait until after, the major changes will be these:
All in all, bankruptcy will soon offer far fewer protections for entrepreneurs.
Today's tip: My wife bought one piece of clothing recently for one of our kids. It didn't fit right, so my wife washed it and tried to return it.
Aghast that my wife had washed the item before returning it, the store refused to refund her money, even though they have a 30-day return policy. My wife tried to explain that she was simply trying to be thoughtful - to not return an ill-fitting item that was dirty, but the store still refused to give her her money back. In the process they lost a good customer - over a $17 item. Dumb policies make for dumb businesses.