The Myth of the Disappearing Business Bankruptcy

Abstract

Although data from the Administrative Office (AO) of the U.S. Courts suggest that only a small fraction of the 1.6 million bankruptcies filed each year are business failures, new research from the Consumer Bankruptcy Project reveals that roughly 17 percent of bankruptcy filings involve the failure of a business. First, the AO's count of the number of business bankruptcy filings is discussed in light of figures from datasets that directly contradict the AO data. It is then argued that attorneys' tendency to misclassify bankruptcy cases filed with automated form software systematically skews the AO data so that fewer cases are reported than actually exist.

Data gathered from a 2001 survey of 1,771 Chapter 7 and Chapter 13 filers, 911 of whom were interviewed by telephone, suggest that AO figures vastly undercount the percentage of bankruptcy filers with a failed business. In fact, nearly 99 percent of the debtors in the survey sample who were identified as business owners appeared in the AO data as non-business cases. An apparent downward trend in business bankruptcies in recent years appears to be inaccurate. It is noted that the tremendous inaccuracy of the government's data on business bankruptcies has implications for bankruptcy policy and legislation.

Keywords: Bankruptcy, Chapter 11 bankruptcy, Chapter 13 bankruptcy, Chapter 7 bankruptcy, Closing firms, Debt