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