While filing bankruptcy is one of the hardest things a small business owner has to do, starting a business while in chapter 13 bankruptcy is indeed possible. But as a small business owner, there’s a lot to consider and learn, and you’ll get both throughout this article.
Chapter 13 bankruptcy takes a heavy toll on any small business owner and requires much effort and sacrifice to see it through. But as you saw above, it’s not the end of your business career. Know that you can be confident and move past it — becoming a small business owner once again!
Learn how you can do so in this article, and learn much more about chapter 13 bankruptcy, as well as:
- What happens to a business owner while filing for bankruptcy;
- What qualifications a small business owner must have to qualify for chapter 13 bankruptcy;
- The different types of bankruptcy;
- How to start a new business after bankruptcy or during it;
- Some things to keep in mind about starting a new business during bankruptcy;
- A few essential tips to help you navigate your new business while you’re in bankruptcy proceedings;
And much more. After this article, you’ll learn everything you need to know about starting a business while in chapter 13 bankruptcy and be confident in your ability to do so.
A Quick Overview of Chapter 13 Bankruptcy:
Chapter 13 bankruptcy is, in essence, a financial reorganization of a business. A business owner that has filed for bankruptcy works with a bankruptcy court to re-organize their finances and pay their business debts to creditors within 3-5 years.
With the Covid-19 pandemic, many small business owners had to file for this type of bankruptcy, so with changes to the CARES act, it was designed to become more available for them to fill their obligations in the smoothest way possible — but has expired in March 26th, 2021, and maintains until today.
Along with a bankruptcy attorney, debtors must compile a list of all creditors and the money owed, information about their income, and detailed monthly expenses. After it, the money is sent to a third party — a bankruptcy trustee — that distributes the money through the outstanding creditors. A debtor will never pay back to their creditors directly.
What Happens to a Business Owner When he files for Chapter 13 Bankruptcy:
As you saw above, the focus of chapter 13 bankruptcy is an organization of your outstanding debts that you have collected. With the help of a bankruptcy attorney, the focus is on paying back those outstanding debts over a pre-determined period — while allowing you to maintain a steady income.
Although paying back creditors is the priority, business owners will always have cash available. While payments for what a bankruptcy attorney might deem unessential — such as luxury goods — tend to be avoided, you can still make other payments like your 401k, medical, and household bills, which aren’t deductible for bankruptcy. Simply put, it prioritizes the monthly payments to creditors while you still maintain your living standards and be able to afford its costs.
What are the Chapter 13 Bankruptcy Qualifications:
To file a chapter 13 bankruptcy proceeding, you must have some qualifications and stand up to bankruptcy attorney standards. Here’s what a bankruptcy court looks at and deems necessary for you to file bankruptcy:
Other Types of Bankruptcy:
There are more types of bankruptcy along with chapter 13, and you must get to know them, as it might suit your small business best if you haven’t filed for bankruptcy yet.
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy is the most popular form of bankruptcy when you have a very high value in debt. This bankruptcy option allows business owners to erase their business’s debt and start over.
But it doesn’t come without heavy setbacks. Although it allows for a complete restructuring of your debt and subsequent elimination, more often than not requires you to lose your home. Unlike chapter 13 bankruptcy which ceases any foreclosure attempts, a chapter 7 bankruptcy makes them a serious possibility.
Chapter 11 Bankruptcy:
Chapter 11 bankruptcy is also very similar to chapter 13 as it allows business owners to restructure their debt and pay it back over time. Although it is more often used by large businesses or LLCs as they can keep conducting business while filling their obligations.
It might allow you to conduct business while restructuring your debt, but this is a time-consuming and very difficult type of bankruptcy to applicate for your business — as well as expensive. Many bankruptcy attorneys point to other bankruptcy options like chapter 13 or chapter 7 to avoid the drawbacks of chapter 11.
Can a Business Owner Start a New Business While in Chapter 13 Bankruptcy:
As the main topic of this article, the answer is very straightforward. As a business owner, you can start a new business the day after you filed for bankruptcy — there isn’t any point in the U.S. law that prohibits you from doing such.
There isn’t any bankruptcy process that prohibits you from any means to make a living — even for entrepreneurs like yourself. But there are some things you must keep in mind if you’re in this situation.
Opening a new business after filing bankruptcy isn’t the same as opening a new business for the first time. Let’s dive deep into some tips and things to keep in mind while doing such — keep reading to find out.
A Few Things to Keep in Mind After Filing for Bankruptcy:
While it is possible to start a new small business while in chapter 13 bankruptcy, there are a lot of variables that you must keep in mind.
Here we’ll go through a few of those points. While it’s true that filing bankruptcy can help with the liquidation of outstanding debts, there are also quite a few factors to account for — or risk having an even harder time completing this already complicated process. Let’s look at a few:
- You’ll have a harder time acquiring funding: A bankruptcy court will, more often than not, deny your request for getting business funding. The fact that you filed for bankruptcy can lead any bankruptcy lawyer to assume you need help controlling your debt, and the last thing you need is to accumulate even more. Also, lenders will be wary of giving you business funding during such. And the ones that lend you will most likely ask for a personal guarantee — which endangers the personal assets you’re trying to protect.
- You’ll suffer a heavy impact on your credit score: Bankruptcy will show on your credit report — making it even harder to acquire a loan from traditional lenders like the Small Business Administration or banks. Most likely, these lenders won’t lend you money until you have good credit — which won’t happen until the process finishes. Although, this should not be a factor that holds your small business as there are more types of funding. If you need business funding during bankruptcy, reach out to Biz2Credit and find the best funding option for you.
- There are debts exempt from bankruptcy: While you might think that filing bankruptcy eliminates debts, it doesn’t eliminate all personal debts. Debts like student loans, severe medical bills, alimony, child support, and tax debts are all unreachable by any bankruptcy law. If your plan to eliminate these debts involves bankruptcy, it’s advisable to look for other options or consult with a debt professional instead.
- Getting approved for bankruptcy is challenging: Even before filing for bankruptcy, getting approved for bankruptcy is challenging in itself. The process takes time to be approved, and even when approved, you’ll have 3-5 years of making monthly payments to your creditors — money that’s deducted from your payment plan and you can’t allocate to the growth of your small business.
- Filing for bankruptcy can get expensive: Bankruptcy is also not cheap. Although the filing fees go for around $300 depending on the state, the costs of attorneys, bankruptcy lawyers, administrative fees, and many other factors can easily escalate the price tag to several thousand dollars. Think about all the expenses of this process, as it can seriously drain your coffers even before you start a new business.
Tips for a Small Business Owner When Starting a New Business While in Chapter 13 Bankruptcy:
If there’s one thing you take from this article, let it be this — although starting a business while in chapter 13 bankruptcy is challenging, it’s by no means impossible. For your small business, a setback will not decide the fate of the future.
While there are things to keep in mind, there are also a few tips to help you navigate this process and put you on better terms to start your new small business. Let’s look at a few you can take to do so:
Don’t make the mistake of lying about your assets:
It might be tempting to pass some of your personal assets or business assets to family members or friends, but this is one of the worst mistakes you can make for yourself and your small business. Passing your car, real estate, or any other asset violates the bankruptcy code and is a surefire way to lose them if you owe creditors money.
Separate your personal assets from your business assets:
Keeping the train of thought of the step above, when filing for bankruptcy, the last thing you want is for the creditors to have the ability to take away your personal goods. When filing for bankruptcy, this will most likely be your best option — especially with chapter 13 bankruptcy that protects your personal liabilities.
It could be worthwhile to wait out the bankruptcy process:
It’s possible to start a new business the day after you file for bankruptcy, but if you can, it might be worthwhile to wait for the process to finish before you do so. Although chapter 13 bankruptcy can take at least three years to complete, once it’s finished, you’ll be free to ask for as much credit or loans as your small business needs. While during the bankruptcy process, you’ll have a very hard time seeing even the most basic loan request approved.
Look for the best type of funding for your small business:
Many attorneys advise you to avoid catching up with more debt — at least without their guided approval. But on the other hand, funding is essential for any small business, and if you start a business while in chapter 13 bankruptcy, you must account for this factor. While you’ll have a harder time acquiring a loan with a bad credit score, you can look for a partnership with good credit, find investors, or look for alternative funding — like Biz2Credit.
Consult with your bankruptcy attorney frequently:
Keep your attorney-client relationship as polished as possible — it’s advisable by many law firms to do so. Bankruptcy processes are very detailed and are difficult for any small business owner focused on the success of their small business to be on par with the developments. Attorneys know all the ins and outs of the process, and even some recently developed situations that can play in your favor, but only they know. That’s why you must keep tabs on your bankruptcy attorney.
Make your small business your top priority:
It all boils down to this step, it is why you’re here. For a small business owner like yourself, this is on top of your concerns. Take into account your monthly payments, outstanding debts, and credit card payments, and write it all down in your business plan. Not only will a well-written business plan help you with lenders, but it is also the blueprint for your small business — and what will guide it to success.
How to Fund Your New Small Business Even in Chapter 13 Bankruptcy:
Filing for bankruptcy is difficult for any small business owner, but it’s not the end of their entrepreneurial career. It’s more than possible to fund their new business even while in chapter 13 bankruptcy, but be aware of the risks and make a point to consult with your bankruptcy attorney before doing such.
While you might not find any luck with traditional lenders that will more than likely request a personal guarantee, you can find any business funding you need at Biz2Credit. Even during bankruptcy, get the smoothest repayment plan possible for your new business. Reach out to our team, and discuss the best funding option for you today!