Starting a New Business After Bankruptcy

Nothing prohibits you from starting a new business after filing for bankruptcy. But obtaining credit will be a problem if you start a new business without first taking the time to rebuild your credit rating. And, if you closed a similar business shortly before opening the new one, you might run into legal problems.

In this article, you'll learn about things to be aware of when opening a new business while having a bankruptcy in your recent past.

Can You Keep the New Business Separate From Yourself?

After a business fails, filing an individual bankruptcy in your name isn't unusual. Most bankruptcy lawyers will tell you it's an efficient way to eliminate your responsibility for business debt while wiping out credit card balances, medical bills, and other personal debt.

For instance, after a business closure, many prior owners wipe out "personal guarantees," or legally binding promises to pay the closed company's debt, by filing for bankruptcy. Many creditors require a business owner or someone with interest in the company to agree to be financially accountable for the business debt because of the frequency businesses go out of business. The contract is known as a personal guarantee.

After a personal bankruptcy, your credit will likely take a hit, and you might not have as much income and assets. So, if you're starting a new business that requires a significant capital outlay, you'll need to do strategic and careful financial planning.

Learn more about starting a new business.

Are You Starting a Similar Business?

It's not a good idea to get into the same business type shortly after closing the old business and filing for bankruptcy. When a company isn't doing well, and the bills start piling up, it's tempting to shut it down or put the business in Chapter 7 bankruptcy before starting the business anew.

Unfortunately, such tactics are more likely to be counter-productive than helpful. Here's why:

• A business can't discharge (wipe out) debt in Chapter 7 bankruptcy.
• An old creditor can collect from the new business if the two companies are essentially the same.
• Trying to avoid paying a creditor through such maneuvering might be considered fraud.
• Using corporate structures won't help because courts disregard business structures such as LLCs and corporations when fraud is involved.

You're unlikely to have a problem if the new business is a unique venture. If it's similar, it would be prudent to consult with a business lawyer.

Preparing for Financing Problems

You know to expect banks and other lenders to ask about your personal credit history when deciding whether to provide business financing. You might be able to increase your chances of approval by:

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

You might be thinking about turning to the small business administration for funding. If you are, exercise caution. Often, the small business administration requires not only a personal guarantee but will also expect you to use personal assets to secure the business debt—most commonly your home.

When Financing Isn't in the Cards

Just because you can't get financed doesn't mean you have to put aside your dream of working for yourself. You might want to consider:

• starting a personal service business that requires little or no operating capital
• working as a subcontractor for an established business to reduce your operating capital needs, or
• taking advantage of one of the many other independent contractor opportunities afforded by the "gig" economy.

Other Considerations

Here are a few other things you'll want to consider before starting your new business after bankruptcy.

• Tax or employer identification numbers. If you closed a previous business, you can't start the new business with the same tax or employer identification numbers, and you'll need to obtain new numbers.
• Paying business taxes. Business owners maintain personal responsibility for business taxes. Avoid being stuck with a substantial bill by paying the business and trust fund tax, debt. The business collects trust fund taxes from others, such as payroll withholding and sales taxes (but usually not excise taxes), and must transmit the payments.
• Extending payment terms to Since financing will be tight in the beginning, make sure that your new business is getting paid for the work it is doing. Extending overly favorable payment terms to customers might result in not getting paid at all.
• Maintain good business records. If you can secure financing, it will likely 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.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.