Why bankruptcy is key to entrepreneurship

In the states, business incorporations are down, but the fact is, new businesses are started every year, no matter what the economy. One reason is that there is a culture of failure, and redemption, in the U.S. When small business fails, the owner may file bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy.

In Ireland, unlike in many western countries, bankruptcy is not an option -- only 29 people were declared bankrupt in 2010 and 17 in 2009. It takes 12 years to be discharged from bankruptcy in Ireland compared to just one year in the UK.

Successive Irish governments have been advised to reform Ireland’s punitive bankruptcy laws, which business leaders say inhibit the development of an entrepreneurial culture. The EU-IMF has made reform of the bankruptcy and personal debt regime a condition of its €85bn bail-out and set a deadline of next March to draw up new legislation.

Matthew Elderfield, Ireland’s financial regulator, recently warned that too short a discharge period for people with mortgage debt could damage the banks, which have been recapitalized with €63bn in taxpayers’ money. “Any approach to restructuring needs to take account of the risk that it creates incentives for borrowers to cease meeting their obligations,” he said.

Funny how everyone is worried about the banks losing out -- when it is the underlying assets that are troubled. In the case of Ireland, those assets are made up of property securing the notes. Why not let people fail, let the banks take a hit, and wipe the slate clean? Starting over is the best way to jump-start the economy, on both side of the Atlantic.