There were more bankruptcies in 2008 than at any time since 2005, when federal law made it tougher to file for bankruptcy. Over a million Americans filed for individual bankruptcy, up 32 percent, and company filings rose 50 percent to 64,318, according to numbers gathered by AACER, a service of Jupiter ESources LLC in Oklahoma City.
"We expected this, that bankruptcy filings are heading right back to where they were before the 2005 bankruptcy law," said Professor Robert Lawless, a bankruptcy law expert at the University of Illinois. "The 2005 bank law didn't do anything to change the underlying economic situation."
Although the majority of bankruptcies are labeled "individual," Lawless said many are in fact small business failures. He estimates the number is about one in seven. Other experts agree small business filings are underreported.
"When people file for bankruptcy because of business debts, most of them are classified as personal filings," said Michelle White, University of California San Diego professor, and a research associate for the NBER. "The court doesn't do a very good job of figuring out which is which."
For the many small businesses now forced into bankruptcy, there are important choices ahead. First and foremost is what type of bankruptcy to file for.
"For small businesses that are in trouble," said White, "Filing under chapter 7 is the way to go." White said that the 2005 bankruptcy reforms have an exception that allows small business owners to avoid a "means test" that could bar them from chapter 7.
However, Lawless cautions that every situation is different, "so get professional help and legal help before taking action." He adds that business owners should go bankrupt for the right reasons. That means not using it as a short-term means to shed debt.
"Bankruptcy is kind of a one-shot deal," Lawless said. "If the problem is that customers aren't coming through your door, bankruptcy isn't going to fix that."