Small Business Bankruptcy

Abstract

Bankruptcy is the legal process by which financially distressed firms and individuals resolve their debts. It is an important part of the legal environment for small business owners and their lenders because small businesses are very risky and often fail and because bankruptcy law affects how business owners and their lenders are treated in the event of failure. Both personal and corporate bankruptcy law are relevant for most small businesses, as even when businesses are incorporated, lenders often require that business owners personally guarantee loans to the business. This article discusses theoretical models and empirical tests of how bankruptcy law affects small business, including the effects of bankruptcy law on incentives to start and remain in business, how bankruptcy law affects small business credit, and whether bankruptcy law leads to efficient decisions concerning whether failing businesses reorganize or liquidate. Research using small business data from both the United States and other countries is covered in this survey.