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HOW MANY PERSONAL bankruptcies are actually small-business bankruptcies in disguise? Between 13 and 14 percent, it turns out.

Two law professors asked about small-business ownership as part of the Consumer Bankruptcy Project, an in-depth study of 2,000 households that declared bankruptcy. Project co-directors Robert Lawless, a University of Nevada, Las Vegas, law professor, and Elizabeth Warren, a Harvard Law School professor and co-author of The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, specifically designed a section of the study to get at the long-suspected connection. Lawless and Warren agreed to give Entrepreneur a first glance at their findings.

"We set out to ask, Are these a distinct subgroup of people filing? And we found that they are," says Lawless. People driven to personal bankruptcy because of business failure are likely to have more assets, income, expenses and debt. They were also proportionally more in debt--although their incomes were higher--than people who simply had jobs. When business owners go under, they go under harder.

The researchers calculated how long it would take for survey respondents to get completely out of debt if they devoted all their income--every penny--to paying off what they owed. For business owners, that would take a median of 3.8 years. For nonbusiness owners, the median payoff duration is 2.9 years.

While the researchers are continuing to scrutinize the data, they've come to one conclusion: Credit card debt plays heavily into the equation, but not in ways you might assume. It's not the amount of credit card debt, but the degree to which high interest rates outstrip the business growth, says Lawless. "It's "hard to turn a profit when you are borrowing money at 18 or 19 percent."

Gary Lawrence Ozenne knows this from painful experience--he suffered from credit card debt and eventually lost his house. The Hemet, California, resident launched a fire sprinkler installation business in 1992. The business took off--so fast that Ozenne's partner decided to leave to set up his own company. Ozenne continued selling big contracts to residential developers and installed thousands of sprinklers.

But by 1997, his enthusiasm for selling was fading, and it showed. The company's income was falling off, and Ozenne started drawing on his investments for living expenses. Firing himself didn't help. The transition from business owner back to employed computer programmer was rockier than expected, and his income dried up almost completely. He filed for bankruptcy to prevent a foreclosure on his house, but bollixed paperwork resulted in a drawn-out tangle of legal and financial technicalities. After multiple filing, he was evicted from his house on February 17, 2003. Says Ozenne, 54, "My personal credit is ruined."

Unfortunately, such situations are common, says Smart A. Feldstein, president of SMR Research Corp., a consumer finance market research firm based in Hackettstown, New Jersey. When business owners pledge personal property--especially houses--as collateral for business loans, they erase any protection they receive by incorporating the business. When the business goes under and the loan is called, the family house is likely to be lost, too.

And it's easy to tell business owners not to use their personal credit cards for business expenses, but many resort to using credit cards when cash flow is tight to pay for essentials like utilities or employees' salaries.

It's hard to pick apart the mix of personal and business credit card debt that contributes to a personal bankruptcy because the bankruptcy filings list only the lender--the bank that issued the credit card--and not the specific charges. After all, the purchases made on the card actually protected those suppliers from the impact of the bankruptcy, because the card issuer buffered them from the bankruptcy hit. The office-supply company and airline gets paid; the credit card issuer does not. But the researchers do suspect two types of card use are more likely to trigger a cascade of financial strain that can bring down a business and a family: cash advances and using the card as a salary substitute for the business owner.

In both cases, the implication is that the business is simply not bringing in enough money to provide for itself or its owner. Continuing to borrow is likely postponing the inevitable.

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