It is hard to start a business. However, it can be even more challenging to establish a new business after bankruptcy filings. Bankruptcy is the most stressful thing you can do. All your assets and income are subject to analysis. Once the legal analysis has been completed, you will be discharged or dismissed. It is just the beginning of your financial problems.
You can file bankruptcy to get a fresh start and leave behind your debts. You might believe that starting a business is easy. It is false. When you set up your business after bankruptcy, there are many financial hurdles. You may have difficulty getting business credit.
It would help if you rebuilt your credit and finances from scratch to make a fresh start. These two essential elements are necessary to start a new business after bankruptcy.
What is the best time to start your own business after bankruptcy filings?
A bankruptcy filing or discharge can be used to start a business.
You must earn income during bankruptcy. You may be required to open a business or do other forms of self-employment.
These are the two main strategies to help you establish your business after bankruptcy.
- a) Learn how to rebuild your credit and finances after bankruptcy
- b) List things to be aware of before you start a new business following bankruptcy
How to rebuild your credit and finances after bankruptcy
After filing bankruptcy, your credit rating will suffer. It is because most of your assets will be liquidated during bankruptcy to pay off your debts. Therefore, it is essential to rebuild your credit score and finances to start a new company.
These are the top four steps that will help you rebuild your credit and finances.
1. Reconfigure your budget
Poor budget planning is the main reason people end up in bankruptcy, even though other financial factors may affect them.
Take what you have learned from your experience and discover why the budget plan did not work. It will be challenging to solve the problem if you don’t know the reason. Some reasons include unplanned investments, overspending, or poor financial decisions. Before making major financial plans, it is essential to evaluate your budget and reconfigure it.
You can categorize fixed, variable and irregular costs
Create a budget. You can categorize expenses into three categories: fixed, variable, or irregular.
List your fixed monthly expenses in the selected category.
List all variable expenses for each month under the variable category. For example, this category may include expenses such as travel, food, and entertainment.
The third category covers irregular expenses such as medical expenses, insurance costs, gifts, and other expenses.
As much as possible, reduce your expenses
To rebuild your finances, determine how much money you will need to save each month. Focus on saving at least 10% each month. Because you have been exempted from many of the terrible debts weighing you down, it will be easier to focus on saving.
Begin by looking at fixed expenses. Then, determine what can be reduced and what can’t be cut. Unfortunately, these expenses are often tied to assets, so it can be difficult to reduce them.
Variable expenses can be reduced much more quickly than fixed expenses, as they are dependent on your choices. Therefore, reduce these expenses as much as possible.
You can also trim irregular expenses as you would with variable costs. You should create a separate account for this purpose and save some money each month to make sure you pay.
2. Plan for savings
If you don’t save money, you won’t be able to reach your financial goals. But, unfortunately, most people don’t save enough money to cover the difference between what they decide to keep and what is held each month.
Automated savings
Your money will be more readily visible and available if it is easy to find.
You must get the money out of your sight before you can touch it. Then, you can open a savings account with a different bank, credit union, or other institution. It will ensure that you don’t see the entire amount of money sitting in your primary account online.
You can set up an automatic, periodic ACH transfer from your checking to your savings account. You won’t need to do anything to save money.
Make an emergency fund!
What amount should you save for an emergency fund? It is your decision.
Keep more cash than you think you will need during your financial recovery after bankruptcy. Start with a $1,000 goal in your savings account. It won’t take long to save 10% of your net earnings.
Prioritize the building of an emergency fund over-investing in the first year after your bankruptcy discharge. Your emergency fund should contain at least one month’s worth of expenses.
3. A “all-cash budget strategy” is a good idea
Credit cards make it easy to spend. As a result, credit cards played a significant role in your bankruptcy.
Even though debit cards are great for a quick recovery from bankruptcy, it can be not easy to track your expenses if you haven’t yet recovered. As you regain financial control, you might switch to cash in the first three to six months.
Take all your debit cards out of your wallet and put them in a safe place.
Account transfers should pay only major recurring expenses such as mortgage payments and car payments. All other costs must also be paid in cash.
You can take control of your finances by changing your spending habits and creating new ones.
4. Rebuild your credit
Chapter 13 bankruptcy filings will remain on your credit report for seven-year, while Chapter 7 bankruptcy filings last about ten years.
It doesn’t mean that you can’t repair your credit. However, it will take many years to recover what you have lost. It will take a lot of work, so be prepared to go along.
First, check your credit report
Pulling your credit report is the first step to rebuilding credit after a bankruptcy discharge. After that, wait three months before creditors can update your credit reports.
Your credit report can be accessed free of charge, but it will not affect your credit score more than once per year. Therefore, once you have reviewed your credit report, it is essential to correct any errors.
It is essential to verify that your credit reports are accurate. You can file a dispute with the credit bureaus if you find anything unusual in your credit report.
Once you have corrected any credit errors, it is time to consider the advantages and disadvantages of a new credit line. Credit cards can tempt you to spend too much. But, on the other hand, they can help you build your credit.
However, it would help if you were careful with new credit cards. You could end up back in the same place you were before you got them.
Secured credit cards are a great way to start
Secured credit cards are good for preventing you from spending too much because they have limited funds.
When applying for a secured card, a bank, credit union, or another provider of cards will require cash deposits as collateral. Check that all three credit bureaus are reported to the card company before opening a secured card account. You can’t rebuild credit without it.
Be sure to pay your credit card bills in full. Keep your credit card usage down for the first few months. After that, your credit card usage can be increased gradually, but you should not exceed your monthly spending limit.
How to start a business again after bankruptcy
The law does not prohibit you from starting a business after filing bankruptcy. However, if you start the process too quickly, it won’t be easy to get credit. Likewise, if you close a similar business within a short time before filing bankruptcy, it could also pose problems.
These are five things to do before you start a new business after bankruptcy.
1. Check the risk factors
You might be a business owner with specialized skills in one industry or product. You might want to use your skills and continue building your business after bankruptcy. Unfortunately, this is not always a good idea.
You could be accused of fraud if you open a business similar to the one you already own. No matter what business type you choose, the consequences will be the same.
The creditor of your previous business may be able to collect any debts that it owes from you. Talk to an attorney to discuss your situation and the potential risks. They can inform you about your options for dealing with creditors.
2. Separate the entities
When a company goes under, it is not unusual for a business owner to file for personal bankruptcy. In addition, to relieve their debts towards the business, many business owners declare personal bankruptcy.
Most cases involve a sole proprietor, a partner in a failing partnership, or signing on behalf of a limited liability corporation or corporate entity.
It would help if you, therefore, created a separate entity for the new business. For example, it could be limited liability or corporation. This strategy has the advantage that these companies are only responsible for business debt.
You will lose the personal guarantee benefit if you sign an emotional bond for the business debt, and you will be responsible as a sole proprietor for the obligations.
3. You should be prepared to address funding issues
Banks and other lenders will need to know about your credit history when you apply for business financing. It will be difficult for them to provide funding if you have poor credit or are in a financial crisis.
There are some things you can do that will increase your chances of approval. You can prepare a detailed business plan, find a partner with good credit, and apply for a small bank loan. Then, contact investors to help you fund your business.
For funding your business, you might also want to consider the Small Business Administration. Be careful! To cover the business debt, the Small Business Administration might require personal guarantees and collateral.
4. Obtain a new tax or employer identification number
- Your former business was a sole proprietorship, and it was included in your bankruptcy
- If you have ever filed for Chapter 7 bankruptcy and liquidated a limited liability company or corporation
Remember that a Chapter 7 bankruptcy cannot discharge a corporation or limited liability company. It is because the company still owes the debt.
Creditors can pursue you even if the business is re-established or a new one is created under a different name for any remaining debts.
5. Pay your business taxes
Most tax debt is non-dischargeable. It means that you will still owe it, even if bankruptcy is declared.
The most important thing when starting a business after bankruptcy is to plan for your taxes. You should create a budget for your business that will allow you to pay your tax obligations on time.
Avoid being penalized with a hefty fine by ensuring that the company pays all its taxes and any trust fund taxes to the property taxation authority.
Trust fund taxes are the taxes that the business collects from other sources, such as sales and payroll taxes. Therefore, they are usually not exempted from taxes.
It’s not the end; it’s just the beginning of something new
Once you declare bankruptcy, you should take the time to create a solid business plan. These strategies and recommendations will help you create a profitable, self-sustaining business.
You don’t have to go bankrupt to live everyday life. It is possible to confront your problems head-on and find cost-effective solutions that will help restore your trustworthiness and credit.
Disclaimer. The opinions and views expressed in this article are the authors Andrew Napolitano.
