How To Start a New Business After Bankruptcy

Starting a business after bankruptcy can feel challenging, but it is possible. After filing for Chapter 7 or Chapter 11 debt relief, you will have the chance for a fresh start for your business.

Bankruptcy is a common fear among business owners and entrepreneurs. These concerns are more common during difficult economic times, like the 2008 financial crisis or the COVID-19 pandemic.

Filing for bankruptcy does not mean your entrepreneurial dreams of starting a business are out of reach. It means there might be more financial difficulty and a few hurdles to consider. Talk to a bankruptcy lawyer about starting a new business after bankruptcy.

Review Your Current Financial Situation

Each type of bankruptcy will affect your business and personal assets and ability to restart. It would be best if you first analyzed the following:

• Why you filed bankruptcy in the first place
• The current health of the economy
• Your knowledge of the industry
• Options for mentorship
• Any past financial mismanagement

Knowing these factors is vital to your next business venture. 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.

What Type of Bankruptcy Did You File?

There are also some key takeaways dependent on which bankruptcy code you filed. 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 small business loans to complete the bankruptcy process
• You may have bad credit history for up to 10 years
• Finding new investors can be challenging

If you filed Chapter 13 bankruptcy:

• 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 risky after the bankruptcy process. Even partners, LLCs, or corporations can grow personal business debt when they think they are protected.

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 separate the new business from the old one.

An attorney experienced in different types of business formation can review your situation and discuss the right business structure for you.

Make a Financial Plan

A bankruptcy can make securing more loans for a new business venture difficult. 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 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. 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 provides Small Business Administration (SBA) loans after bankruptcy
• Look for local grants to get you started
• Layout the expected costs of rent, equipment, materials, and labor
• Explain payment terms and interest rates 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 relying on paper can lead to errors or missing documents.

When To Bring in a Bankruptcy Attorney

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