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Can Bankruptcy Stop Me From Starting a Business?

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The law doesn't prevent you starting a new business after bankruptcy, the Nolo legal website says. It's even possible to do this during bankruptcy. However there are practical obstacles you'll have to overcome.

Finding Financing

If your business idea needs funding, lenders may be uninterested. Bloomberg Businessweek reports that lenders are more likely to refuse entrepreneurs who have a bankruptcy on their record; lenders who do offer credit charge higher interest rates.

Tip

Bankruptcy falls off your credit report after 10 years. You can rebuild your credit score before that time by paying your post-bankruptcy bills and debts on time, consistently. This helps in getting more credit.

There are several workarounds when you're unable to qualify for business financing:

  • Start a business that doesn't require borrowed money. Personal-service businesses often cost little to launch.
  • Draw up a convincing business plan and approach private investors and venture capitalists.
  • Join forces with a partner who has good credit.
  • Apply for start-up grants and loans offered by your local community.

If you decide you need a bank loan, be prepared to explain your bankruptcy. If you can show it was caused by a one-time event, rather than just bad financial judgment, you'll have a better shot at a loan.

During Bankruptcy

In Chapter 7 bankruptcy, your debts are usually discharged after three to five months. Chapter 13 bankruptcy takes three to five years, so you may not want to wait for the discharge before starting your new business.

You'll need court approval during bankruptcy to borrow money for out-of-the-ordinary business expenses, such as buying new equipment or vehicles. In Chapter 13, all your disposable income during bankruptcy goes to your creditors. The court may refuse to approve the loan if they think it will reduce what your existing creditors get.

Another drawback, the Chen & Tran law firm notes, is that if your business takes off and your income increases, the court can require you pay creditors more.

Forging Ahead

Once you can afford to start your new business, there are several steps you should consider taking:

  • If you liquidated a prior business in bankruptcy, you'll need to take out new tax identification numbers for your new company.
  • Be careful about extending easy credit to customers. Your financial situation is going to be tight for a while, so you need a dependable cash flow.
  • Keep good records so you can show how well you're managing the money and paying off any financing you do get. This will help when you ask for more financing.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.