The new bankruptcy law that takes effect this October will hit small-business owners much harder than previously thought. That's the conclusion of a new study, which appears in the most recent issue of the California Law Review, by Robert Lawless, a law professor at the University of Nevada–Las Vegas, and Elizabeth Warren, a Harvard Law School professor. The law makes it more difficult to wipe away debt by mandating that bankruptcy filers pass a means test. For example, a petitioner with a family income greater than the state's median may have to enter a repayment plan.

The study found that the Administrative Office of the U.S. Courts, which tracks bankruptcies, failed to count as business related approximately 220,000 to 280,000 filings by entrepreneurs, self-employed individuals, and independent contractors who needed bankruptcy relief in 2003 to recover from unsuccessful business ventures. The AO data show that only 2.3 percent of 2003 bankruptcy filings were business related, while Lawless and Warren say the number is as high as 17.4 percent. The AO disagrees, saying the study incorrectly focuses on the type of debtor as opposed to the type of debt.

Why the discrepancy? The study authors blame software that attorneys routinely use to generate bankruptcy filings, which incorrectly, the authors say, counts many businesses as consumers. "This suggests that there are more small businesses filing bankruptcy than we thought, so it's inevitable that the small-business sector may not be as healthy as we thought," says Lawless. "The type of bankruptcy system a small-business owner needs is quite different from the type a consumer needs."