Starting a business after bankruptcy can feel challenging, but it is entirely possible. After filing for Chapter 7 or Chapter 11, you will have the chance for a fresh start for your business. Bankruptcy is a common fear among business owners and entrepreneurs, even more so during times of upheaval, like the 2008 financial crisis or the COVID-19 pandemic. Filing for bankruptcy does not mean your entrepreneurial dreams of starting or maintaining a business are out of reach. It just means there might be more financial difficulty and a few hurdles to consider.

Consider Your History

Each type of bankruptcy will affect your assets and ability to restart. You should first analyze:

• Why you filed bankruptcy in the first place
• The current health of the economy
• Your knowledge (or lack of) of the industry
• Options for (or lack of) mentorship
• Any past mismanagement of finances

Knowing these factors is vital to your next business venture. Note: If your future business is too similar to your old one (such as closing a small design firm to open another design firm), creditors may still come after your unpaid debts. There are also some key takeaways dependent on which chapter you filed for. If you filed for Chapter 7 bankruptcy:

• The business did not receive a debt discharge (unless you were the sole proprietor), so there can be future liabilities
• You are debt-free and can't personally face a lawsuit
• You may have bad credit for 7-10 years

If you filed for Chapter 11 bankruptcy:

• You are likely recovering from the high cost of filing this type of bankruptcy
• Consider if you took out loans to complete the bankruptcy process
• You may have bad credit for up to 10 years
• Finding new investors can be challenging

If you filed for Chapter 11 – Subchapter V bankruptcy:

• The fast process is helpful, but you may not have had adequate time to consider your new business plan
• You may have bad credit for up to 10 years

If you filed for Chapter 13:

• Make sure you can afford your repayment plan payments while funding a new business

Separate the Business From Yourself

Separating your personal liability from your business is helpful. A sole proprietorship may be a large risk after the bankruptcy process. Even partners, LLCs, or corporations can grow personal business debt when they think they are protected. An attorney experienced in business formation is the right person to review your situation and discuss the right business model for you. Creditors often make new businesses assign someone to be financially accountable and sign a personal guarantee for any potential losses. Avoid doing this if you want to avoid future debt issues. You will also need new tax and employer identification numbers to keep the new business separate from the old one. An attorney experienced with business and tax issues can make sure you don't miss any of these steps, answer questions, and help you through the process.

Make a Financial Plan

A bankruptcy can make it difficult to secure more loans for a new business venture. Before starting a business plan, you must:

• Get all your finances in order (show assets, debts, property, and accounts receivable)
• Pay current and future bills on time
• Avoid acquiring new debt
• Monitor your credit report for errors and improvements
• Work to rebuild your credit

Complete these essential steps before starting on your future business plans. Future creditors or investors will want to see your finances under control before considering giving you money.

Create a New Business Plan

A business plan should be highly developed and well-informed to help you with potential lenders, future business partners, vendors, or others you wish to work with in the future. You can expect to:

• Find a partner with good credit (if needed)
• Consider future hardships with financials and create plans to overcome them
• Find a bank that will give loans after bankruptcy
• Look for local grants to get you started
• Layout the expected costs of rent, equipment, materials, and labor
• Explain payment terms for loans
• Explain payment terms for your customers
• Not allow services to customers on credit
• Offer collateral or additional reassurance to vendors
• Get creative with financing alternatives or investors

Consider every angle, possibility, and future outcome for the business to create a strong plan.

Properly Maintain Business and Financial Records

It is vital to keep diligent records and profit and loss statements for:

• Paying taxes correctly (and possibly finding tax breaks)
• Transparency with your lenders
• Keeping track of your income and payments from clients

Find an electronic system for reliable record keeping, as simply relying on paper can lead to errors or missing documents.

When to Bring in a Business Attorney

No time is too early to consult with a small business attorney. They can help you avoid mistakes and start out on the right foot. While spending the money upfront can feel difficult after debt and bankruptcy, it tends to save you money in the long run to do things legally and correctly the first time.