Articles
Douglas G. Baird & Edward R. Morrison, Serial Entrepreneurs and Small-Business Bankruptcies, 105 Colum. L. Rev. 2310 (2005).
Abstract (from authors): Chapter 11 is thought to preserve the going-concern surplus of a financially distressed business - the extra value that its assets possess in their current configuration. Financial distress leads to conflicts among creditors that can lead to inefficient liquidation of a business with going-concern surplus. Chapter 11 avoids this by providing the business with a way of fashioning a new capital structure. This account of Chapter 11 fails to capture what is happening in the typical case. The typical Chapter 11 debtor is a small corporation whose assets are not specialized and rarely worth enough to pay tax claims. There is no business worth saving and there are no assets to fight over. The focal point is not the business, but the person who runs it. She is a serial entrepreneur, searching for the business that best matches her skills. For the vast majority of cases, then, Chapter 11 is best seen through the lens of labor economics, not corporate finance. Chapter 11 offers the entrepreneur increased liquidity as well as a forum for renegotiating debts (such as unpaid withholding taxes) for which she as well as the corporation are liable. But Chapter 11 offers these benefits only to entrepreneurs who remain with their existing businesses. This lock-in effect is qualitatively no different from the one commonly associated with rent control. These effects, as well as the costs the process imposes on third parties, should be the focus of any assessment of how well Chapter 11 works.
Brian A. Blum, The Goals and Process of Reorganizing Small Businesses in Bankruptcy, 4 J. Small & Emerging Bus. L. 181 (2000).
Abstract (from author): In examining the problem of dealing effectively with the bankruptcy rehabilitation of small businesses, this Article is primarily concerned with the judicial initiatives and legislative reform efforts relating to Chapter 11. However, because a significant number of small business cases qualify for and are dealt with under Chapters 12 and 13, the Article goes beyond Chapter 11 to consider the relationship between all three of these rehabilitation Chapters and the alternative regimes that they make available to some, but not all, small business debtors.
Don B. Bradley & Michael J. Rubach, Small-business Bankruptcies: A Comparison of Causes From 1981 and 1995, 11 J. Bus. & Entrepreneurship 31 (1999).
David I. Cisar & Shay A. Agsten, Second Chances: Serial Filing Effectively Prohibited in Small Businesses Chapter 11s, 30 Am. Bankr. Inst. J. 24 (2010).
Abstract (from authors): Congress sought to streamline and truncate the chapter 11 process for small business debtors as a part of the changes to the Bankruptcy Code in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Prior to the changes in the Code, “available statistics suggested that as few as five percent of Chapter 11 debtors confirm and perform plans and survive as operating entities.”It was noted that “the majority of Chapter 11 debtors cannot generate positive cash flow going forward” and that “[t]his problem [did] not regulate itself because the Bankruptcy Code [did] not discourage debtors that lack genuine prospects for reorganization from filing under Chapter 11.” Certain changes were made to the Code, and some were intended not only to make the process of filing a chapter 11 case easier and less costly forsmall business debtors but to also make it easier to identify problematicchapter 11 cases where the prospects for confirmation and successful performance of a chapter 11 plan are dim.
Matthew Cormack, The Cost of Representation: An Argument for Permitting Pro Se Representation of Small Corporations in Bankruptcy, 2011 Colum. Bus. L. Rev. 222 (2011).
Abstract (from author): Bankruptcy filings have steadily increased as the economy struggles to recover from the mortgage and financial crisis. Total filings increased 27.4 percent from fiscal year 2009 to 2010. In fiscal year 2010, 61,148 businesses filed for bankruptcy, and 13,553 filings occurred under Chapter 11. The failures and subsequent bankruptcies of massive corporations such as Lehman Brothers and General Motors have grabbed headlines. However, large businesses account for only a fraction of total bankruptcy filings. Studies of bankruptcy filings have shown that the vast majority of bankruptcy petitions are filed by small businesses.Small business bankruptcies increased 44 percent from the third quarter of 2008 to the third quarter of 2009.
If these small businesses are corporations, LLCs, partnerships or other artificial entities, they are required to appear in bankruptcy court through a licensed attorney. Even for those businesses that are able to afford such representation, the cost--relative to the firm's assets--can be extremely high, reducing the total assets available to creditors during litigation. This Note argues that bankruptcy judges can and should be more willing to create exceptions to the rule requiring all corporations to attain representation.
Rafael Efrat, Bankruptcy Study: Senior Entrepreneurs in Bankruptcy, 42 Creighton L. Rev. 83 (2008).
Abstract (from author): Senior entrepreneurs do not only constitute a sizeable number of small business owners in the United States, but they also report a higher self-employment rate as compared to their younger counter-parts. For example, one study found that almost 25% of all employed men in the United States aged sixty-five and older and 13% of those aged fifty-five to sixty-four are self-employed, compared to only 8% of those aged twenty-five to fifty-four. For women, the propensity to become self-employed is lower than men, however, a greater proportion of women still opt to become self-employed at an older age. Whereas 14% of all employed women age sixty-five or older are self-employed and 9% of all employed women aged fifty-five to sixty-four are self-employed, only 6% of employed women are self-employed among those aged twenty-five to fifty-four. Some scholars have contended that these figures have seriously under-stated the disproportionate share of the self-employed among middle aged individuals. These scholars point out that previous studies examining the self-employment rate among seniors only studied unincorporated, self-employed individuals. According to such studies, incorporated individuals who work for themselves were not classified as self-employed but were rather classified as wage and salary workers because they are technically paid employees of a business entity, regardless of whether the worker is the only employee of the business.
Wei Fan & Michelle J. White, Personal Bankruptcy and the Level of Entrepreneurial Activity, 46 J. Law & Econ. 543 (2003).
Abstract (from author): The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of noncorporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore that the probability of owning a business increases as the exemption level increases. We test this prediction and find that the probability of households owning businesses is 35 percent higher if they live in states with unlimited rather than low exemptions.
Donald R. Korobkin, Vulnerability, Survival, and the Problem of Small Business Bankruptcy, 23 Cap. U. L. Rev. 413 (1994).
Abstract (from author): This Article addresses the following question: To what extent should the law promote the survival of a financially distressed business as a going concern? In other words, what should be the "survival standard" that defines and limits the role of the law in this regard? I will approach this question by way of normative theory -- by sketching a model that identifies underlying principles of bankruptcy law. After using these principles of bankruptcy to define a normative survival standard, I will then apply this standard to evaluate current reorganization law. My special focus in this latter part of the Article will be on small businesses. I will argue that this survival standard supports the need for legislative action that responds to the special characteristics of small businesses and small business failure.
Edward R. Morrison, Bargaining Around Bankruptcy: Small Business Workouts and State Law, 38 J. Legal Stud. 255 (2009).
Abstract (from author): Federal bankruptcy law is rarely used by distressed small businesses. For every 100 that suspend operations, at most 20 file for bankruptcy. The rest use state law procedures to liquidate or reorganize. This paper documents the importance of these procedures and the conditions under which they are chosen using firm-level data on Chicago-area small businesses. I show that business owners bargain with senior lenders over the resolution of financial distress. Federal bankruptcy law is invoked only when bargaining fails. This tends to occur when there is more than one senior lender or when the debtor has defaulted on senior debt (harming trust-based relationships with lenders). These findings raise questions about the design of and need for federal bankruptcy law.
Yongwook Paik, The Bankruptcy Reform Act of 2005 and Entrepreneurial Activity, 22 J. Econ. & Mgmt. Strategy 259 (2013), available at:http://ssrn.com/abstract=2245423.
Abstract (by author): This paper empirically investigates the effect of the Bankruptcy Reform Act of 2005 on entrepreneurial activity. The author finds that this act had virtually no noticeable effect on the overall level of entrepreneurship, measured by self‐employment, partly because potential entrepreneurs were more likely to seek limited liability to offset the reduction in wealth protection imposed by the new law. That is, the incorporation rate increased for small businesses after the new law was enacted. This increase emphasizes that limited liability provided by incorporation is an important strategic variable that potential entrepreneurs utilize in response to changes in personal bankruptcy law. This study implies that incorporation is an important parameter to consider in understanding the relationship between bankruptcy law and entrepreneurial activity. The policy implication of this study is that entrepreneurs do respond to changes in personal bankruptcy law, even though it is intended for consumers, so this potential side effect should be considered when designing a new law.
Mike W. Peng, Yasuhiro Yamakawa & Seung-Hyun Lee, Bankruptcy Laws and Entrepreneur- Friendliness, 34(3) Entrepreneurship: Theory & Prac. 517 (2010).
Abstract (from authors): Using bankruptcy laws as a case of formal institutions, we show how formal institutions impact entrepreneurship development. Historically, bankruptcy laws usually have been harsh. Recently, many governments have realized that entrepreneur-friendly bankruptcy laws can not only lower exit barriers, but also lower entry barriers for entrepreneurs. Since bankruptcy laws are not uniform around the world, it is important to understand how they differ in their friendliness to entrepreneurs. This Article focuses on six dimensions of entrepreneur-friendliness: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedures, (3) the cost of bankruptcy procedures, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets during reorganization bankruptcy, and (6) the opportunity for entrepreneurs and managers to remain on the job after filing for bankruptcy. In an effort to cover both developed and emerging economies and to draw on geographically diverse examples, we use data from Australia, Canada, Chile, Finland, Hong Kong, Japan, Norway, Peru, Singapore, South Korea, Thailand, the United States, and other countries to illustrate these differences. Overall, this Article contributes to the institution-based view of entrepreneurship by highlighting the important role that formal institutions such as bankruptcy laws play behind entrepreneurship development around the world.
Gregory R. Schaaf, Small Business Cases Develop Some Teeth, 10 Am. Bankr. Inst. J. 46 (2010).
Abstract (from author): Two years after the enactment of thenot much law had developed regarding the new small businessbankruptcy provisions. Three years later, debtors are making more use of the small business bankruptcy provisions and courts have had an opportunity to provide guidance on some issues. This article addresses more recent case law interpreting some of the BAPCPA small businessbankruptcy provisions.