Study Shows Lack of Bankruptcy Knowledge Among Entrepreneurs
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Study Shows Lack of Bankruptcy Knowledge Among Entrepreneurs

When starting up a business, most entrepreneurs are so concerned with making sure everything will work, they don't stop to consider what would happen should something go wrong. And, according to a recent study conducted by Howard Van Auken of Iowa State University, most people who start businesses aren't even aware of the bankruptcy protections available to them.

The study, called "The Impact of Bankruptcy Laws on the Entrepreneurial Decision: Are Entrepreneurs Even Aware," sought to determine the causes of small business failures in the United States. Apparently, this is no minor problem: the US Census Bureau estimates that 50% of businesses with fewer than 500 employees fold within four years of starting.

Van Auken collected his data by distributing surveys about bankruptcy awareness to small business owners. The surveys tested knowledge of the kinds of bankruptcy, how to file bankruptcy, state bankruptcy law and exemptions, and the likelihood of losing a home in bankruptcy.

Perhaps not surprisingly, almost none of the 90 respondents were familiar with Iowa bankruptcy regulations.

The lack of knowledge of the vast majority of respondents led Van Auken to believe that no relationship exists between the level of protection offered by bankruptcy law and the likelihood of people to start businesses, even though in the past, people have generally assumed otherwise.

The study goes a step further in examining the data gathered: Van Auken suggests that states should design bankruptcy legislation specifically to encourage the sort of risky behavior needed to start and run a small business. Why?

As large corporations continue to take over smaller, independent companies and revenues are directed to non-local big business owners, local economies in many states are changing. And small companies are finding the market more and more difficult to compete in.

Indeed, small business owners have many bumps in the road that bigger companies don't have to worry about. The New York Times reports about one man whose business was hurt by loss of his lease, the September 11th attacks on New York City, and serious personal illness.

Rather than filing bankruptcy, though, this entrepreneur reportedly turned to Corporate Turnaround, a privately-run business designed specifically to help small companies avoid bankruptcy and get out of debt. Though companies like Corporate Turnaround can be effective, they can also be costly. And when bankruptcy seems inevitable, money for such services isn't always available.

Van Auken's analysis recommends that states offer greater protection of entrepreneurs' personal property, which would make bankruptcies less devastating if a business went under. According to his research, protections like this one are fairly common in the European Union and ought to be mimicked by the United States.

One of the most significant parts of Van Auken's study is the discovery that so few business owners are aware of the bankruptcy protections available to them. Learning as much as you can about bankruptcy can help you make better financial decisions-whether or not you're starting a business.

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