America is the land of dreams. By easing small business set-up requirements, every land of dreams makes it easy for its citizens to become entrepreneurs. Small businesses are the key to financial success for most Americans. These small businesses also play a very critical role in the economy. The current recession has taken its toll on many small businesses and these businesses are now filing for bankruptcy. Here’s a look at what’s behind the small business bankruptcy statistics:
1. A small business typically files a bankruptcy petition under Chapter 7 or Chapter 11 of the Bankruptcy laws. Chapter 7 bankruptcy means liquidating the business. After the business files for bankruptcy, the court appoints a case trustee who scrutinizes the company’s financials, un-executed contracts and creditors and then draws up a list of assets that can be sold to pay off the creditors. The assets are then sold and the proceeds are utilized to repay the creditors in order of their priority. After the money is distributed, the business ceases to exist. Small businesses that have no hope of surviving file for Chapter 7 bankruptcy.
Small business bankruptcy statistics reveal that businesses that see a future in continuing their operations but want more time to repay their debts opt for Chapter 11 bankruptcy, which is also referred to as reorganization. When the business owner files for Chapter 11 bankruptcy, he has to draw up a reorganization plan in which he spells out how he will repay his debts over the extended time frame. The majority of the creditors have to agree to the reorganization plan. If they approve the plan, the court confirms it and the business owner must execute it as per its terms. Once the plan is fully executed, the company is then debt free.
2. Small business bankruptcy statistics are often not a very reliable indicator. Obtaining correct data of many small companies and analyzing it accurately can be quite a challenge. This is because a small business is not required to report its financial numbers. So, one should not get taken in by the statistics.
3. Most small businesses are very small and over 50% of these are started from home or from the garage. Only a few employ people. So, even the small business bankruptcy statistics can be skewed because many failed small businesses may just fold up without resorting to bankruptcy. Their debts may be too small for their creditors to take legal action.
4. According to the National Federation of Independent Business, 30% of small businesses break-even while 31% lose money – the rest are profitable. Now, when a small company sells itself or merges with another company, it is reported as a failure, which can lead to wrong assumptions. That said, small business closure or failure statistics should also be analyzed and not taken at face value.
These are the facts behind small business bankruptcy statistics. So, while reading and interpreting statistics, remember to dig deeper and understand the finer points before drawing conclusions.
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