Can You Start a New Business After Filing for Bankruptcy?

If you have filed for and completed bankruptcy proceedings, nothing can prevent you from starting a new business. However, you may face additional challenges. While your goal of starting a business is not out of reach, there may be some financial difficulties and challenges to overcome.

How Does Filing for Business Bankruptcy Affect Your Credit Score?

Damage to your credit score from filing a business bankruptcy will depend on whether the business debts appear on your personal credit report. This typically only occurs when you personally sign for or guarantee debts. Business credit reporting can be found on Dun & Bradstreet, but not usually for smaller businesses. On the other hand, a personal bankruptcy may even improve your credit score, as it typically decreases your debt-to-credit ratio and removes debts from your credit report.

What Factors Can Impact Your Ability to Start a New Business After Bankruptcy?

The types of challenges you face in starting a new business after bankruptcy can depend on certain factors, including:

Type of Bankruptcy You Filed

The impact of filing for bankruptcy on your ability to start a new business can depend in part on which bankruptcy code you filed. If you filed for Chapter 7 personally, unless you were the sole proprietor, old business debts would not be discharged. You will be debt-free personally, but you may take a credit hit for seven to 10 years. If your business filed for Chapter 11, you may be recovering from the high cost of the proceedings, your credit could be affected for up to 10 years, and finding new investors may be challenging. If you filed for Chapter 13, you must continue making payments on your repayment plan while starting a new business, and those payment plans typically last for a full five years.

Relationship Between Personal and Business Finances

Many owners of failed businesses are advised by their attorneys to file for bankruptcy individually to wipe out personal debts, such as credit card balances while eliminating responsibility for business debts. Filing for personal bankruptcy can nullify personal guarantees and legally binding agreements to pay the debts of a failed company. It can also significantly impact your credit, limiting financing availability for a new business.

It is important to separate personal liability from your business as much as possible. A sole proprietorship may be risky, both before and after bankruptcy. Partnerships, LLCs, and corporations provide more protection, but not always enough. Creditors may require owners of new businesses to be held financially accountable by signing personal guarantees. This should be avoided if possible, but it often isn’t. Consult an experienced attorney on the best way to structure your new business.

Similarity of New Business to Closed Business

Many business owners have a particular skill set that comes into play in certain industries. Starting a similar business too soon after filing for business bankruptcy can lead to legal problems. Creditors of the bankrupt company could file lawsuits against the new company, claiming that, while still owing debt, you retained your assets from the bankrupt company and started a new company providing the same goods or services, which may be considered fraud. If the two companies are essentially the same, an old creditor can collect from a new business. The courts disregard corporate structures such as corporations and LLCs when a case involves allegations of fraud.

Financing Challenges

Lenders will investigate your personal credit history when you apply for business financing. If you file for personal bankruptcy after a business fails, it can have a significant impact on your credit, and you may not have enough personal capital to invest in a startup. However, there are other possible ways to obtain the funds you need, including:

  • Finding a business partner with good credit
  • Looking for investors to fund your new business
  • Seeking out a bank that provides Small Business Administration (SBA) loans after bankruptcy
  • Looking for grants offered by local communities as incentives for businesses
  • Applying for financing with small community banks

Financial planning is crucial when you are starting a new business after bankruptcy. Take the following steps to improve your prospects before starting on new plans:

  • Prepare and maintain accurate financial records showing your assets, property, debts, and accounts receivable.
  • Do not acquire any new debt.
  • Monitor your credit report for improvements and correct any errors.
  • Pay all your bills on time.
  • Start working to rebuild your credit.

Tax Considerations

Business owners are held personally responsible for taxes associated with the business. When you start a new business, it is essential to get a separate, new tax identification number. Keep up with collecting and transmitting payroll and sales taxes. Maintain accurate business records and refrain from extending overly favorable payment terms to clients or customers. It is also important to look for any available tax breaks.

New Business Plan

To start a new business, you will need to create a new business plan. If your business plan is well-informed and highly developed, it can help you secure future partners, vendors, and lenders. Lay out projected costs, such as equipment, materials, labor, and rent. Explain payment terms for customers and explain interest rates and payment terms for loans. Offer collateral to vendors. Be creative with alternative financing and investors. Search for local grants to help your new business get started. Also, consider future financial hardships and how you plan to overcome them.

How Can an Experienced Business Bankruptcy Attorney Help?

If you are starting a new business after bankruptcy, it is never too soon to consult with an experienced business bankruptcy lawyer. Our skilled and versatile attorneys can help you avoid costly errors and get your business started on the right foot. Call Israel & Gerity at 800-659-7575 to schedule a free consultation. Our seasoned legal team can provide the sound legal guidance you need.