As far back as eight to ten years ago, when rising bankruptcy rates began being the stuff of headlines, researchers debated whether the cause of all those bankruptcies was spendthrift consumerism. Some commentators were saying that small business bankruptcies were becoming fewer in number, especially under the new revised bankruptcy laws, while the number of personal bankruptcies was rising.
A more in-depth look at the situation with small businesses shows how misleading this perception can be. As a bankruptcy attorney in Indiana, I work with many small business owners in addition to working with individuals and families. What I am finding bears out the truth of a study published in the California Law Review called “The Myth of the Disappearing Business Bankruptcy.” The article brings out the fact that the computerized forms used to file bankruptcy often end up “pigeonholing” many debtors as consumers, rather than as self-employed workers and entrepreneurs driven to bankruptcy by business debt.
In my bankruptcy blog I’ve written many times about the fact that the small business owner’s personal and business finances tend to be closely intertwined. From a legal standpoint, as I’ve remarked in earlier blogs, if the business is a sole proprietorship rather than a corporation, the business cannot file bankruptcy on its own behalf; the business owner is the one who is filing. Nonetheless, the core reasons for the bankruptcy have to do with the business challenges, rather than with personal troubles.
That 2005 study revealed that 20% of bankruptcy filings were at least partly business-related. The study was funded by the non-profit Ewing Marion Kaufman Foundation for Entrepreneurship in the hope that the findings would be considered by lawmakers when revising bankruptcy laws. For example, current bankruptcy law (as I’ve written about in earlier blogs) requires credit counseling for debtors to help them with budgeting issues. The Kaufman Foundation emphasized that many business owners fail because of reversals in their marketplace and in their industry. Counseling on managing finances is hardly what is needed for such entrepreneurs!
In my years of dealing with business owners all over the state of Indiana, I’ve found the same thing. I’ve seen business owners brought down by forces beyond their control; even when the business itself has been well-managed and well-planned, sometimes it’s just bad timing for a particular business. That’s where the safety net of bankruptcy comes into play, and that’s where my work lies.