Starting a New Business After Bankruptcy in 7 Steps

Can you start a new business after declaring bankruptcy?

Yes, you can. But I won’t sugarcoat it—it will likely be more challenging than starting your first business, especially if you need a bank loan or investor funding. 

Navigating bankruptcy is difficult, but it doesn’t have to be the end of your business journey. 

You just need to confront your problems head-on and focus on:

• Rebuilding your finances and credit.
• Assessing risk and thoroughly planning out your new venture.

Whether you filed for personal or business bankruptcy, this article will guide you through seven practical steps to recovery and give you a better chance of successfully starting a business. 

Legal Disclaimer: This content is provided for informational purposes only and does not constitute legal or financial advice. Bankruptcy and financial recovery involve complex legal and financial decisions. I strongly recommend consulting with a qualified financial advisor or bankruptcy lawyer to discuss your specific circumstances and to receive advice tailored to your situation.

1. Rebuild your finances

Your personal credit will take a big hit after filing for bankruptcy in the following situations:

• You file for personal bankruptcy to cover your own expenses.
• You file for personal bankruptcy to cover the expenses of your business.
• You file for business bankruptcy and signed a personal guarantee.
• You operate as a sole proprietor.
• You operate a general partnership and must file for personal bankruptcy to cover unpaid business debts.

Depending on the type of bankruptcy you file for (more on that in the next section) some personal assets may be protected and portions of your debt discharged. But in most cases, you will be left liable to pay off all or some of the remaining personal and/or business debts.

This will impact your personal credit score and assets, requiring you to rebuild both if you intend to pursue financing for a new business. 

Here are the steps I recommend you take to start improving  

Review and revise your personal budget

Begin by reviewing your personal budget to understand what went wrong, such as overspending, overleveraging personal assets, taking out too much debt, or not preparing for an emergency scenario.

With this knowledge, create a revised personal budget (we’ll tackle the business finances in step five) that reflects your new situation. If possible, focus on improving the areas that tripped you up. 

At a minimum, cut back unnecessary expenses to help you with the next step. 

Establish savings and manage expenses

You need to replenish your cash reserves and develop an emergency fund. This will help cushion you from unforeseen expenses and give you additional capital for your new business. 

If you struggled with saving before, try the following:

• Automated Savings: Open a savings account at a separate bank and set up automatic transfers to build your savings without being tempted to spend it.
• All-Cash Budget: For the first few months, use cash for most transactions to regain control over spending habits, excluding major recurring payments like mortgage or car payments.

Rebuild your credit

Rebuilding credit is a gradual process that can take years and requires careful management. After a bankruptcy discharge, wait a month or two and then pull your credit report to ensure it’s current.

Focus on identifying and correcting errors. If you notice anything unusual, contact the credit bureaus and file a dispute for errors. Then focus on paying your bills on time, keeping balances low, and avoid opening unnecessary accounts.

While your path to recovery fully depends on your situation, one thing I recommend you do is apply for a secured credit card. These cards include lower spending limits and often require cash deposits with the institution that issues the card (similar to a debit card). 

Any new credit can be risky, but this is one of the least risky options to help speed up the process.

2. Understand the impact of the type of bankruptcy you filed

The type of bankruptcy code you filed can impact whether:

• You have to liquidate assets or take part in a repayment plan.
• You must get legal approval for more debt or to start a new business.

If you filed for business bankruptcy, the specific type can also impact whether:

• Your current business can remain operational.
• Your personal credit also takes a hit.

Key Takeaways:

If you file for Chapter 7 or 11, you are not restricted from starting a new business. With Chapter 7, your current business will cease to exist, while Chapter 11 allows you to remain operational and possibly revive your business.

Chapter 13 is limited to sole proprietors or personal bankruptcy. It limits the impact on personal asset liquidation and allows you to repay over a period of time. However, there are far more legal restrictions that can impact your ability to pursue financing or start a new business.

For more information, check out the following overviews of each bankruptcy code or visit the official US Courts website for the full legal definitions (links in each section). 

Chapter 7 bankruptcy

Often referred to as “liquidation” bankruptcy, Chapter 7 is a process designed primarily to help individuals and businesses eliminate their unsecured debts. 

For business owners, filing for Chapter 7 means your business ceases operations, and its assets are liquidated by a court-appointed trustee. 

Things to consider:

• The bankruptcy remains on your personal/business credit report for up to 10 years.
• The current business cannot continue operations.
• If you’re a sole proprietor, most unsecured debts are discharged, and certain personal assets are exempt from liquidation.
• There are no legal restrictions for starting another business.

Chapter 11 bankruptcy

Chapter 11 is primarily used by corporations, partnerships, and sole proprietors. It allows your business to continue operating while restructuring its debts. 

This type of bankruptcy is known for its complexity and high cost, making it more suitable for larger businesses or those with substantial assets.

Things to consider:

• The bankruptcy will appear on the business’s credit report and impact your business credit.
• It may also impact your personal credit score if personal guarantees are involved.
• You have greater flexibility for relieving debt, including selling assets, extending deadlines, or renegotiating deals.
• It prevents creditors from collecting debts or seizing assets during the bankruptcy process.
• Chapter 11 is more costly than the other options regarding legal fees and administrative expenses.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is designed for individuals, not businesses. However, it can be used by sole proprietors and individual business owners, to restructure their debts. 

This allows you to continue operating your business while repaying creditors under a court-approved repayment plan, typically over three to five years.

Things to consider:

• Bankruptcy will remain on your personal credit report for up to 7 years.
• Debts are consolidated into a single monthly payment plan.
• You can keep your property and assets while making these payments.
• You must adhere to a strict budget managed by a designated trustee.
• You must obtain court approval for major financial decisions, including taking on new debt or starting a business.

3. Check the risk factors

Before planning a new business, it’s crucial to understand what risks may be involved. 

While I recommend you consult with an attorney who can assess your situation, explain the risks, and advise you on how to proceed—here are a few risks unique to bankruptcy worth considering.

Debts follow you

Creditors of the previous business may be able to collect outstanding debts from your new venture. Regardless of the business structure you choose, you may face fraud allegations if the new business closely resembles the old one. 

Difficulty with additional financing

Getting funding from traditional lenders and investors will be more difficult if you’ve filed for bankruptcy within the last 7-10 years. You are seen as a riskier debtor. 

If you are approved, expect less funding and higher rates unless your personal credit has recovered.

Tip: Create a one-page business plan and starting forecasts early on to help you better understand how your new business will work and what it will take to be profitable. This can help you avoid pursuing a venture that brings unnecessary risk or will be unsustainable in your current situation.

4. Separate the business from yourself

It’s not uncommon for a business owner to file for personal bankruptcy when the business firm collapses—which can discharge some or all of their personal liability for business debt.

In most cases, the owner is a sole proprietor, a partner in a failed partnership, or signed on behalf of a limited liability company or corporate entity.

So, you should create a separate entity for your new business, such as a corporation or a limited liability company. The advantage of this strategy is that these types of companies are solely accountable for the business debt.

Warning: If you sign a personal guarantee for the business debt, you will lose this benefit and will be responsible for the obligation as a sole proprietor.

5. Prepare thorough financial forecasts

Even if you haven’t gone through bankruptcy, creating a detailed financial forecast is necessary to:

• Set realistic business goals
• Anticipate and manage expenses
• Determine if your business can be profitable
• Maintain a healthy amount of cash

As you run your business, it will also provide you with a way to compare your expectations against actual results. This means you’ll more easily foresee potential problems and opportunities and can adjust before they seriously impact your business.

Creating your forecasts

There’s no need to overcomplicate your financial plan; just focus on creating complete forecasts for sales, expenses, and cash flow that cover the next year. 

Your goal is to gain a true and accurate understanding of how much money you will need to start and run your business. 

Because you recently struggled with mismanaging personal finances, your expense budget should also be strict and detailed. The last thing you want is for those habits to translate to your business and lead to the same fate.

Then to help with eventual funding, be sure to also create a profit and loss statement and balance sheet. Check out our guide on writing a financial plan for complete walkthroughs on creating each financial statement. 

Exploring scenarios

While not required, creating forecasts for multiple business scenarios can better prepare you to manage unforeseen events. 

At a minimum, adding a worst-case forecast where sales aren’t as strong as expected can help you proactively plan to deal with it. You can also create scenarios where you get additional funding or exceed expectations to ensure you know how to manage that extra income.

Luckily, you can use your actual forecasts as a starting point for these variations.

Speaking to your bankruptcy

While you do not need to address your personal bankruptcy within your plan or financials, you will likely need to explain it to investors and lenders. They will review your credit history and want to understand if your financial issues will impact your business. 

After all, they’re investing in you as much as they are your business.

Creating detailed and reasonable financial forecasts can help alleviate some of their concerns. However, you should be prepared to address your bankruptcy and recovery to avoid being seen as unprepared.

6. Get new tax or employer identification numbers

You need new tax or employer identification numbers for starting a business if:

• Your old business was a sole proprietorship and was included in your personal bankruptcy
• If you previously filed for Chapter 7 bankruptcy and liquidated a corporation or limited liability firm

Remember that a corporation or a limited liability business cannot be discharged under Chapter 7 bankruptcy. The company still owes the debt.

As a result, if you re-establish the business or start a new one under a different name, creditors can still pursue you for a debt that wasn’t completely discharged.

7. Pay your business taxes and maintain good records

Tax debt is usually non-dischargeable, meaning you’ll still owe it after declaring bankruptcy. When launching a business after bankruptcy, including tax repayment as part of your larger plan is crucial. 

Here’s how to ensure your new venture stays on track:

• Create a dedicated budget: Set aside funds to pay your business tax obligations on time. This will help prevent costly penalties.
• Prioritize trust fund taxes: These are the taxes your business collects from others, such as payroll withholding and sales taxes (but usually not excise taxes). Pay these promptly to the proper taxation authority to avoid significant issues.

It’s not the end; it’s the start of something fresh 

After you’ve declared bankruptcy, take time to put everything you’ve learned into a solid business strategy. Know your financial situation, start rebuilding your credit, and thoroughly plan the steps to create a self-sustaining and profitable business.

Remember, this is meant to be a guide to help you recover. It does not constitute legal advice. I strongly recommend consulting a qualified financial advisor or bankruptcy lawyer to discuss your circumstances.

Bankruptcy does not mean you are doomed for the rest of your life. All it takes is confronting your problems head-on with thorough, cost-cutting solutions that will help you reclaim your credit and trust. 

Check out the following resources for additional guidance to start and plan your new business:

• How to Start a Business With No Money
• Legal Requirements to Start a Business
• How to Self-Fund Your Business
• Small Business Crisis Fundraising Explained