When a small business fails, it is generally other small businesses that pay the price. That was the conclusion of a bankruptcy study recently conducted by professors at the University of Chicago Law School with academics from Switzerland and from the Graduate School of Management at the University of California, Davis. The study, which looked at 139 businesses that completed a Chap. 11 reorganization, found that unsecured creditors generally receive about $0.60 on the dollar if the business under reorganization has assets greater than $5 million. But if the business has assets under $200,000, unsecured creditors get less than 50 percent of their claim. And general creditors often get nothing at all. “The thing that hit us over the head is when you look at common press accounts that talk about these giant airlines is that those cases really don’t have a lot to do with what the typical bankruptcy case looks like,” said Douglas Baird, a bankruptcy scholar at the University of Chicago and one of the study authors. Baird said the study authors wanted to investigate the conventional wisdom that Chap. 11 reorganization provided a vehicle and a safety net for general creditors to receive some of the money they are owed. What they found instead, is that when a small business fails, the proceeds of a Chap. 11 filing are more typically divvied up between landlords and various tax collectors, with little or nothing left for other small businesses that provided goods and services to the troubled company. “What we wanted to do is give a wakeup call to a lot of the economists who write about Chap 11 and say, here’s what the typical case looks like,” Baird said. The study examined 139 Chap. 11 cases in Arizona and New York between 1995 and 2001, a sample the authors described as “the largest and most comprehensive” for an academic paper. Nothing left “While serious bargaining among many players takes place in the megacases in which millions or billions are at stake, bargaining is largely absent in smaller cases as there is no ambiguity about how the losses are borne,” the study authors wrote. “In the typical case, secured creditors are paid, the lawyers are paid, and the balance goes to the tax collector. Little or nothing remains for anyone else.” Chap. 11 proceedings, also known as reorganization, differ from Chap.7 bankruptcy cases, which result in liquidation, in that they are theoretically designed to pay off some of the company’s debts while keeping it intact to continue to do business. But when a company has $1 million in assets or less, it is unlikely that there will be anything left over for general, unsecured creditors when everyone else is paid. Often these smaller companies’ assets lie in the human capital of their founder and, the study found, there isn’t even enough money left to pay legal and accounting fees. Rather than lawyers, the real culprit is the tax collector, the study found. For businesses with assets greater than $5 million, tax liabilities amounted to only 2.1 percent of all debt and most of these businesses had no tax liability at all. But three-quarters of the companies with assets of less than $200,000 had unpaid tax obligations that amounted to about a quarter of their total debt. “The tax collector alters the dynamics of Chap. 11,” the study authors wrote. Rather than income taxes, these small businesses typically have been delinquent on payroll and sales taxes, which the owners have often borrowed against as they found themselves in a cash crunch. Without these tax obligations, the authors said, the small business owner would more likely simply walk away from the business. But the tax bill, and the likelihood of becoming personally liable for unpaid taxes, is often the driving factor in these Chap. 11 filings. “Secured claims, priority tax claims and the costs of the bankruptcy process exhaust the estate in the typical case when the business has fewer than $200,000 in assets,” the study found.