Illustration by Peter Hoey

In Monopoly, declaring bankruptcy has a very permanent consequence. Game over; you lose.

In the paper “Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy,” HBS professor Shai Bernstein and his coauthors, visiting associate professor Emanuele Colonnelli, Mitchell Hoffman, and Benjamin Iverson (PhDBE 2013), discovered that many small business owners are operating under Monopoly rules in the real world, with bankruptcy considered a stigmatized, permanent end, unaware that it can be used as a protection while negotiating with creditors. Some large companies, meanwhile, rely on that protection to renegotiate their debt obligations and become financially healthier.

Of the two types of filings, chapter 7 is the liquidation of business assets; chapter 11 is a tool often used by large firms to restructure debt and stay in business. But in a 2020 survey of 1,500 small-business owners, only 34 percent of respondents were familiar with the differences between the two types, and half were unaware that a business can operate after filing for bankruptcy.

In fact, in February 2020, Congress passed a law designed to make bankruptcy more accessible and less costly for small businesses. Only 11 percent of small business owners were aware of it. In their survey, the researchers also found that 70 percent of respondents believed those who file for bankruptcy are regarded as failures; more than half said customers and employees are less likely to work with those owners.

A follow-up survey found short educational videos had significant immediate- and medium-term impacts on increasing knowledge of bankruptcy among business owners, while also reducing the stigma. However, a search of public court records revealed that none of the small businesses involved in the experiment had filed for bankruptcy within a year of its conclusion.

Why? Bankruptcy judges and lawyers opined that it is the overconfidence of entrepreneurs and the perceived financial cost that leads to the underutilization of bankruptcy protection. Bernstein and his coauthors believe those frictions, as well as the existing stigma surrounding bankruptcy, and the lack of knowledge about it, must be taken into account when designing new policies aimed at increasing the use of bankruptcy as a strategy by small businesses.

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