It is hard to start a business, but it can be even more difficult to establish a brand new business after bankruptcy filings. Bankruptcy is the most stressful. All your assets and income are subject to analysis. Once the legal analysis has been completed, you will be discharged or dismissed. This 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. This is false. When you set up your business after bankruptcy, there are many financial hurdles. You may have difficulty getting business credit.
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You must rebuild your credit and finances from scratch in order to make a fresh start. These two essential elements are necessary to start a new business from scratch after bankruptcy.
These are the two main strategies to help you establish your business after bankruptcy:
- Learn how to rebuild your credit and finances after bankruptcy
- List things to be aware of before you start a new business following 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.
You may require court approval to borrow additional money to finance your business.
Ways to rebuild your credit and finances after bankruptcy
After filing bankruptcy, your credit rating will suffer. Your assets will be liquidated during bankruptcy to pay off your debts. It is important to rebuild your credit score and finances in order to start a fresh and 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 past experience and discover the reasons that the budget plan did not work. It will be difficult to solve the problem if you don‘t know the reason. Unplanned investments, overspending and poor financial decisions could all be reasons. Evaluate and re-configure your budget before you make any major financial plans.
You can categorise fixed, variable and irregular costs
Create a budget. You can categorise your expenses in three categories:
- Fixed
- Variable
- Irregular.
List all variable expenses for each month under the variable category. This category may include expenses such as travel, food, and entertainment. The third category covers irregular expenses such as medical expenses, gifts, insurance costs and other expenses.
As much as possible, reduce your expenses
To rebuild your finances, determine how much money you will be required to save each month. Focus on saving at least 10% each month. Because you have been exempted from many of the terrible debts that were weighing you down, it will be easier to focus on saving.
- Analyse your fixed expenses to determine what can be reduced and what can‘t be cut out. These expenses are often tied to assets, so it can be difficult to reduce them.
- Variable expenses can be reduced much more easily than fixed expenses, as they are dependent on your choices. Try to reduce these expenses as much as possible.
- You can also trim irregular expenses as you would with variable expenses. You should create a separate account for this purpose and save some money each month to make sure you pay.
2. Save money by planning
If you don‘t save money, you won’t be able to reach your financial goals and results. Most people don’t save enough money to cover the difference between what they decide to save and what is actually saved each month.
Automated savings
You are more likely to spend your money if it is easily accessible.
You must get the money out of your sight before you have the ability to touch it. You can open a savings account with a different bank, credit union, or other institution. This will ensure that you don‘t see the entire amount of money sitting in your main primary account online.
Make an emergency fund
What amount should you save for an emergency fund. This is your personal decision.
Keep more cash than you think you will need during your financial recovery after bankruptcy. It won’t take long to save a total of 10% of your net earnings. Also, prioritise creating an emergency fund instead of investing in the first year after your bankruptcy discharge. Your emergency fund should contain at least one month’s worth of expenses.
3. You can try an “all-cash budget strategy.”
Credit cards make it easy to spend. Credit cards played a major role in your bankruptcy.
Even though debit cards are great for those who have just emerged from bankruptcy, it can be difficult to track your expenses if you don’t have a bank account. As you regain financial control, you might switch from debit cards to cash within the first 3-6 months. Take all your debit cards out of your wallet/purse and put them in a safe place.
Only major recurring expenses such as mortgages, car payments, or utilities should be paid by account transfers. All other expenses must also be paid in cash. You can hold control of your finances by changing your spending habits and creating new ones.
4. Rebuild your credit
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First, check your credit report
The very first step to rebuilding credit after a bankruptcy discharge is to pull your credit report. After your bankruptcy discharge, wait three months for creditors to 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. Once you have reviewed your credit report, it is important to correct any errors.
It is important 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. They can help you build your credit.
However, you should be careful with new credit cards. You could end up back in the same place you were before you got them.
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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 credit union, bank or other 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 cannot 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. 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. If you start the process too quickly, it will be difficult to get credit. If you close a similar business within a short time before filing bankruptcy, it could also pose problems.
These are 5 things you need to do before you start a new business after bankruptcy.
1. Examine the risk factors
You might be a specialist in one industry or product, as many business owners do. You might want to use your skills and continue building your business after bankruptcy. This is not always a very good idea. You could be accused of fraud if you open a business that is similar to the one you already own. No matter what business type you choose, the consequences will be the exact 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 the owner of a business to file for personal bankruptcy. In order to relieve their personal debts towards the business, many business owners declare personal bankruptcy. Most cases involve a sole proprietor, partner in a failing partnership, or signing on behalf of a limited liability corporation or corporate entity.
You should therefore create a separate entity for the new business. This could be a 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 a personal bond for the business debt and you will be responsible as sole proprietor for the obligations.
3. You should be prepared to address funding issues
When you apply for business financing from banks or other lenders, they will inquire about your credit history. It will be difficult for them to provide funding if you have poor credit or are in a bad financial position.
There are some things you can do that will increase your chances of approval. You can;
- Prepare a detailed business plan
- Get a partner with good credit.
4. New Tax/Employer Identification Numbers
- Your former business was a sole proprietorship, and it was included in your personal 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. 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 taxes
Most tax debt is non-dischargeable. This means that you will still owe it, even if bankruptcy is declared.
The most important thing when starting a new 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 penalised with a large 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. They are usually not exempted 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 and stable business plan. These strategies and recommendations will help you create a profitable, self-sustaining business.
You don’t have to go bankrupt in order to live a normal life. It is possible to confront your problems head-on and find cost-effective solutions that will significantly help restore your trustworthiness and credit.
ActionCOACH can help you develop and grow your business through a wide variety of services, from business coaching and mentoring to sales training and marketing assistance. No matter what stage your business is in, our team of experienced coaches can help you take it to the next level.
If you’re serious about starting a new business after experiencing bankruptcy, ActionCOACH is the perfect partner to help you get there.
Contact us today at 01305 566150 or email westdorset@actioncoach.co.uk for a FREE business coaching session.
