The Tax Debts of Small Business Owners in Bankruptcy

By Rafael Efrat, 2008. 36 pages.

Porter Ranch, CA 91326 under contract no. SBAHQ-06-M-0515

*This contract was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information 

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy. For more information, write to the Office of Advocacy at 409 Third Street S.W., 

Washington DC 20416, or visit the office's website at www.sba.gov/advo.

Purpose

The objective of this study is to investigate the 

burden tax obligations impose on small business 

owners (both individuals and entities) at the time 

of their bankruptcy filing. This is an important 

area to study given the existing documentation on 

the adverse impact tax debts have on the financial 

viability of petitioners both before and after bankruptcy filing. 

Overall Findings

This study documents the pervasiveness and the 

magnitude of the tax burden among small business owners in bankruptcy. The data suggest that 

the tax burden is more pervasive among small 

business owners in bankruptcy than among consumer petitioners. While fewer than one-quarter 

of all consumers in the bankruptcy sample reported tax debts, more than half of individual small 

business owners reported owing some tax debts. 

Individual small business owners in bankruptcy 

proceedings who are encumbered with high tax 

debts are generally in a precarious financial condition and are worse off financially than small business owners who have low or no tax debt.

Highlights

• Men, who constituted 57.1 percent of the 

sample, were significantly more likely to be in the 

bankruptcy sample compared with the general 

U.S. population, where men constitute 49 percent 

(U.S. Census Bureau, 2005). Women petitioners were more likely to file under Chapter 7 and 

Chapter 13 of the Bankruptcy Code rather than 

Chapter 11, where they made up only 19.1 percent 

of petitioners. Most individual petitioners were 

married, one-third were single, and one-fifth were 

divorced or separated. 

• Differences between the two groups are also 

reflected in homeownership rates. Almost twothirds of the population own homes nationwide, 

compared with 47 percent of individuals in the 

bankruptcy sample. Similarly, the median fair 

market value of the houses owned by individual 

bankruptcy petitioners was $107,200, compared 

with a median value of $217,000 across the nation 

in 2006. 

• The heavy debt burden, along with the lower 

homeownership rate, contributes to the negative 

net worth in the bankruptcy sample. The mean 

net worth of the individual bankruptcy petitioner 

was –$28,299, and their median net worth was 

–$19,110. More than 77.5 percent of the individual petitioners in the bankruptcy sample had a 

negative net worth compared with 12.6 percent in 

the general population outside of bankruptcy

• Overall, the data show that almost 30 percent of all petitioners in the bankruptcy sample 

reported owing some kind of tax debts. The data 

further indicate that individual entrepreneurs 

reportedly owed tax debts more often than small 

business entities. The table also suggests that 

individual small business owners from California 

and Texas most often reported tax debts, while 

individual small business owners from Tennessee 

reported tax debts least often.

Scope and Methodology

The database for this project is a nationally representative sample of 1,903 bankruptcy schedules 

filed by petitioners (both individuals and entities) 

February 2008 No. 317
in five federal judicial districts between October 

17, 2005, and October 16, 2006 (California, 

Tennessee, Pennsylvania, Illinois, Texas). The time 

period was selected to coincide with the new federal bankruptcy legislation that became effective 

on October 17, 2005 (Bankruptcy Code, 11 U.S.C. 

§§ 523(a), 1322(a)(2), 1141(d) (1978), as amended 

by Bankruptcy Abuse Prevention and Consumer 

Protection Act of 2005). The bankruptcy schedules were accessed through the PACER system. 

Access to this database was granted by the clerks 

of the courts of the various judicial districts. The 

sample included consumers, individual business 

owners (i.e., sole proprietors), and business entities (i.e., corporations, LLCs, etc).

This report was peer reviewed consistent with 

the Office of Advocacy’s data quality guidelines. 

More information on this process can be obtained 

by contacting the director of economic research at 

advocacy@sba.gov or (202) 205-6533.

Comments from Advocacy

This study is an important addition to small business research, analyzing the link between bankruptcy petitioners and taxes.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. 

Small Business Administration's Office of Advocacy 

are available on the Internet at www.sba.gov/advo/

research. Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2008-105140

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