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There May Be More Financially Distressed Small Business Owners Than You Think

posted by Bob Lawless

Last night, I caught the tail-end of a commercial for debt relief services aimed just at small business owners. Commercials for debt relief services are hardly unusual, especially in these financially troubled times. It was striking, however, to hear a commercial aimed only at struggling small-business owners.

To some, but this might seem like a small market. The data suggest otherwise. Elizabeth Warren and I once co-authored a paper finding that 1 in 7 bankruptcy filers identify themselves as self-employed at or near the time of bankruptcy. ("The Myth of the Disappearing Business Bankruptcy," California Law Review, 93:745-95 (2005)). At current filing rates, those numbers would imply over 200,000 bankruptcies each year have a relation to a small business. Of course, only a fraction of persons who experience financial distress end up filing bankruptcy. Although I am not aware of any data setting a precise number, for each person filing bankruptcy, there are several more in financial distress who do not. Financially distressed business owners could present a very large market indeed.

Those findings were from the 2001 wave of the Consumer Bankruptcy Project. In a chapter for a forthcoming book edited by co-blogger Katie Porter, I report that the 2007 wave reported a similar incidence of self-employment. Moreover, when the self-employed arrive in bankruptcy court, they arrive in worse financial condition than other bankruptcy filers. Even as compared to other bankruptcy filers, the self-employed have very high amounts of credit card and general unsecured debt, making them perfect targets for the debt relief firms.

If you found this post because you are considering debt-relief services, the Federal Trade Commission has a web page with some information you will want to see. Also, many state attorneys general have web sites that will provide more specific information for your state such as this one from Illinois Attorney General Lisa Madigan.

If you are looking for specific information about Corporate Turnaround, which is the company I saw advertising its services for small business owners, Google will lead you to all sorts of sites with testimonials about their services. To make a fully informed decision, remember that reasoning from testimonials is often a logical mistake known as hasty generalization. Information that is more difficult to find about Corporate Turnaround is that it appears to be a trade name for Commercial Credit Counseling Services, Inc. Here is a press release and cease-and-desist order from the Oregon Department of Consumer and Business Services directed at Commercial Credit Counseling Services, Inc., d/b/a Corporate Turnaround. Also, here is an appellate opinion from an Indiana state court in a lawsuit against Commercial Credit Counseling Services. Finally, this letter (at p. 10 of Attachment 1) to the Federal Trade Commission by forty state attorneys general discussing abuses in the debt relief industry mentions a settlement in a case called State of North Carolina v. Commercial Credit Counseling Services, Inc. d/b/a Corporate Turnaround, (Wake Cty. Sup. Ct. 06CV14672) although no details about the case are given.


One problem is that small businesses really have no viable option for reorganization in bankruptcy.

Small business Chapter 11 is a joke. No one uses it. It puts small businesses on a short leash in terms of time tables, with no substantial advantages to the debtor.

Chapter 13's debt limit is too low. For individuals with primarily business debts, the debt limit should be lifted substantially if we want to save jobs instead of killing small business under a wave of Chapter 11 administrative expenses for lawyers, committee expenses, etc.

I hear that the NBC put out some kind of idea to use Chapter 12 for small business reorganization, but it is just an idea and, unlike Chapter 13, there isn't a national infrastructure to deal with general business cases. Some places have active Chapter 12 trustees, but many places do not.

The problem for small businesses also comes from the fact that much of the credit availability has dried up. Even businesses with decent cash flow have had their loans whittled down or cut off all together.

All in all, not good for the avowed goal of keeping and creating jobs.

After 2001 we had a large number of Trucking businesses file. The spike in energy really did a number on them. We are still seeing Trucking businesses but for a different but same reasons..... A lot of your locals run pumps, rigs, etc. for oil drilling companies here in Texas. When Oil flattened out they stopped drilling. Those same truckers lost contracts to haul all the equipment and product. We have been in a drought so they couldn't make up the difference in Agg either. Oil Industry is coming back online now and their 13 Plans are more doable now. We are seeing seeming unrelated business file as well. Restaurants in small "Oil towns" (I call them that because most of the citizens work in the field). We are a beach town so we are also seeing souvenir shops, consignment shops..etc.. Definitely more Biz now than in the past. We are getting 4 confirmed on Monday.

I don't want to beat a "dead horse" but.... Wow! 7-8 more biz initial appointments this week... WTHeck? Odd odd odd. Definitely not the norm.

Unfortunately, Patches, I think it's the "new normal".

It was just a matter of time apparently. There seemed to be a bit of a lag though...?? I guess that's logical but what really sux is that some of these guys blow through their 401ks, IRA, take out home EQs etc..(which makes things difficult in 7s because the UST is going to open everything up especially in non-corp 7s) It's like "duck diving" a "cleanup set" that was already broken 5 yards in front of you. No matter what, your going to get your clock cleaned! They saw it coming but did not know if they should paddle towards the horizon or back to shore. Watching from the relative safety of the BK biz, it makes you cringe seeing it unfold. I mean we all (credit slippers and others) saw it coming but its up to those in the "water" to make a decision.


Most of the people who run small businesses have a special kind of mental illness. They are optimistic to the point of insanity. Of course, you have to be if you know the real failure rate for small busiensses, and decide to roll the dice and start one anyway.

But, god bless 'em - their (sometimes blind)determination is what creates most of the jobs that get created in this country. And to keep them at their crazy endevors - for the good of us all - we should let them discharge their debts a little more easily than consumer debtors. That's why the Means Test doesn't apply to debtors who don't have primarily consumer debts.

True so True...

I can't agree more. :D

Just came across this post and what you say is so true. Small business owners do need to be optimistic but it can lead to a unfavorable ending if they don't know when to call it quits.

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