Starting a New Business After Bankruptcy

Tips for getting credit and setting up a new business after you have filed for bankruptcy.

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There is nothing in the bankruptcy law that prohibits you from starting a new business after bankruptcy. In fact, you might be able to apply some lessons learned from your prior financial problems to keep you out of trouble in the new business. Of course, if you start the new business soon after your bankruptcy, it might be difficult to obtain credit.

Here are some tips for getting credit and setting up a new business when you have a bankruptcy in your recent past. 

Keep the Business Separate From Yourself

If you were forced to file for bankruptcy because of business debt you incurred as a sole proprietor or a partner in a failed partnership, consider using a different form for your new business. Business entities such as corporations and limited liability companies are legally separate from their owners. Debt of the business is not necessarily the personal responsibility of the shareholder or member. Of course, if you sign a personal guaranty, this benefit is lost and you are taking on the business debt as your own.

(To learn more about different business structures, see Nolo's Business, LLCs, and Corporations Center.

Obtain New Tax or Employer Identification Numbers

If your prior business was a sole proprietorship and part of your personal bankruptcy or if you liquidated a prior corporation or limited liability company in a Chapter 7, you can’t start the new business with the same tax or employer identification numbers. You need to obtain new numbers.  Corporations and limited liability companies do not receive discharges in Chapter 7 bankruptcies. If you re-open them, the old creditors can still take action to collect any debts which were not paid in full in the bankruptcy.

Be Prepared for Problems Obtaining Financing

Even if you start the new business as a corporation or limited liability company, if you are the sole owner, banks and other lenders will likely ask about your personal credit history when they consider providing financing to the business. You could take some steps to increase your chances of having the business approved for financing by:

  • preparing a comprehensive business plan
  • opening the business with a partner that has good credit
  • finding investors to partially fund your business
  • applying for financing from a small community bank, or
  • looking for financing or grants offered as incentives to business by local communities.

Small Business Administration Loans: Use Caution

While turning to the small business administration might sound like a good idea, exercise caution. Often, the small business administration requires not only personal guarantees for loans, but also requires you to use personal assets, most commonly your home, to secure the business debt. 

Consider Alternatives to Financing

When starting a new business, consider alternatives to obtaining financing. Whether they will work for you will depend on the type of business your are starting. You may want to consider:

  • soliciting investors to fund your business
  • starting a personal service business that requires little or no operating capital, or
  • working as a subcontractor for an established business to reduce your operating capital needs.

Pay All Business Taxes

To avoid any personal responsibility for business taxes, make sure that the business pays its tax debt timely and, most importantly, clearly identifies and pays to the property taxing authority any “trust fund” taxes. If you don’t, you may end up being personally liable for the taxes.

Trust fund taxes are the taxes that the business collects from others, such as payroll withholding and sales taxes (but usually not excise taxes). The business has the responsibility to collect and transmit the payment but is not directly paying the tax.  

Be Careful About Extending Payment Terms to Your Customers

Since financing will be tight in the beginning, make sure that your  new business is getting paid for the work it is doing. Extending payment terms to customers that are overly favorable might result in not getting paid at all.  

Maintain Good Business Records

If you are able to secure financing, it is likely that it will be on a short term but renewable basis. Keep good records so that when the loan is up for renewal you can provide accurate figures to show that your business is succeeding and building up its own good credit.

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