Why are bankruptcies on the decline?

Hi Tara:
Although I haven't seen any data that ties the rate of bankruptcy to the rate of business starts, I agree with your idea that now is a better time to go into business than 2009.

As you imply with your question, the fact that small business bankruptcies are declining suggests that the period of tight credit and low customer demand may be past. In 2009, many businesses failed and were forced into bankruptcy (chapter 7 is court-supervised asset liquidation, chapter 11 is court-supervised restructuring) because their lowered revenue streams could not sustain the business expenses and the debt. The creditors forced bankruptcy to ensure that their rights were protected.

In the past year, small businesses that survived 2008 and 2009 were able to meet their obligations even with the greatly depressed levels of customer demand. For example, demand for consumer electronics declined 15% in 2009 over 2008 (according to the Consumer Electronics Association). The slightly greater customer demand of 2010 (CEA forecasts 4% up), with the survival-level cost structures of 2009 meant they could meet their obligations for this 'down' year too.

Government regulation tends to make starting business and doing business more complicated and costly. Hopefully, with the new Congress and the dozens of job-sensitive (Republican) state legislatures and governors newly sworn in for 2011, we will see business-encouraging changes to government regulations such as dropping the 1099 provision of ObamaCare and lowering the corporate tax rates.

So, I do think that it will be easier to go into business, mostly because customer demand is returning - more opportunity to make money - and the changes in government may end up making regulations less costly for starting and doing business.