June 21, 2005--A new study by professors from Harvard and the University of Nevada has concluded that official data from the Administrative Office of the U.S. Courts (AO) inflated the success rate of small businesses and may make it harder for entrepreneurs to get bankruptcy protection going forward.
The study suggested that the recently passed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may have been based on misleading information regarding small businesses.
"The new bill makes it much tougher to declare bankruptcy," said Robert Leitan, vice-president for Research and Policy at the Kauffman Foundation, which funded the study. "Had Congress been more aware of the statistics giving a false picture of the extent to which entrepreneurs were bound up in bankruptcy, maybe they would have written the bill differently." Leitan said he believed that potentially inflated success rates for businesses may have caused them to be overlooked when the new bankruptcy bill was written.
In their report, Harvard law professor Elizabeth Warren and Robert M. Lawless, a law professor at the University of Nevada, asserted that the official data was miscalculated in part because entrepreneurs often carry a heavy, personal investment in their businesses, causing them to label their bankruptcy as "individual" rather than "business" and thereby skewing the data by as much as 15.4%. According to government figures, just 2.0% of all 2003 bankruptcy claims were officially reported as "business." However, Lawless and Warren projected this percentage to be 13.5%-17.4%, citing up to 315,000 actual business bankruptcy filings in 2003, as opposed to the officially reported 35,000.
Dick Carelli, spokesman for the AO, pointed to the ambiguities regarding consumer and business categories as the central source of differences between the study's and official figures, particularly the difference of opinion on the service sector, such as free-lance writing, consulting, and independent contracting. Because many of these businesses require little physical capital, the AO did not consider their bankruptcy claims as business, whereas Lawless and Warren did. "The professors have adopted their own definition of business bankruptcy," he said.