What is Bankruptcy?
Bankruptcy is a loaded word – often associated with negative stigma – but it is an option that can be beneficial for some individuals who are struggling with excessive debt. There are essential steps one must take first before deciding whether bankruptcy is the right option for them financially.
Bankruptcy is a legal proceeding carried out by a person who is unable to pay their debt, and it can help an individual with their astronomical debt (either severely reduced or eliminated). It can save them from losing their house, their car, or more. However, bankruptcy does not apply to other types of debt like student loans, child support, spousal support or tax-related obligations. These are important factors to take into consideration when thinking about bankruptcy.
In theory, bankruptcy sounds like a lifesaver, but there is a negative stigma for a reason. Filing for bankruptcy has a severe impact on credit and can affect almost every aspect of your life moving forward. A low credit score debilitates the options available to an individual: future loans, insurance rates, living situations and, in some instances, future job opportunities. Every person has a unique situation, but in theory, claiming bankruptcy might be the soundest decision when your life is in a more substantial, secure position instead of when you are beginning to craft your adult life.
Chapter 7 and Chapter 13 Bankruptcy
There are several different “types” of bankruptcy: chapter 7 bankruptcy, chapter 13 bankruptcy and chapter 11 bankruptcy. Before the legal proceedings begin, it is required that you, as the debtor, will first complete a “credit counselling session,” and file a bankruptcy petition. There will be a lot of ground to cover in this credit counselling session: your personal situation, budgeting advice, debt management counselling, alternatives to bankruptcy (which should always technically be your last-ditch effort), and an assessment of your financial statements.
A “means test form” will determine which type of bankruptcy you will file. If your income is low enough, you will file for chapter 7 bankruptcy. If your income is higher, you will have to pay a filing fee and file for chapter 13 bankruptcy. Chapter 11 bankruptcy is in another category entirely, which pertains to the big businesses filing for bankruptcy (like many companies across the globe during this COVID-19 pandemic).
Chapter 7 bankruptcy is the most common amongst individuals filing for bankruptcy. This is referred to as “straight” bankruptcy, or “liquidation.” A trustee is appointed by the court to repay your creditors partially through selling some of your property. Possessions like your car, clothing, pensions, and some equity in your home are typically exempt from this process, but there are certain limitations. When filing for chapter 7 bankruptcy, your credit will experience a hard impact for approximately ten years. If you are interested, find out more about Chapter 7 bankruptcy from the United States Courts.
There is a more elaborate process that comes along with chapter 13 bankruptcy. Firstly, this type of bankruptcy should require a lawyer to help assist with the necessary and tedious details of the bankruptcy filing process. Chapter 13 bankruptcy results in a pre-approved plan with the court detailing how you will pay off your debt in three to six years. Within that time frame, your credit score is preparing to bounce back as filing for chapter 13 bankruptcy will impact your credit for roughly seven years. If you diligently make the agreed-upon payments, your assets will remain safe from liquidation. For more information, find a chapter 13 bankruptcy lawyer at Leinart Law Firm.
How Does it Affect Starting a Business?
Now, you might be wondering how bankruptcy affects your potential to start your own business. It does not necessarily sound like a good thing to potential lenders, as there’s a stigma that you might have tunnelled yourself into a mountain of debt that you cannot escape. However, this is just another obstacle that you will need to consider in the laborious process of business startup. It is an added difficulty, but not a complete impossibility.
Depending on which type of bankruptcy you have filed for, this will affect your business timeline. With chapter 7 bankruptcy, your debt is typically “discharged” within three to five months. Chapter 13 bankruptcy takes significantly longer: three to five years or the allotted time you have agreed upon with the court. If you have filed for chapter 13 bankruptcy, you may not want to wait that entire time before you are ready to start a business. One drawback that comes from starting a business post-bankruptcy is finding approval for a loan: who would want to lend you more money when you are unable to pay off your previous debt?
Here are several steps to consider when starting a new business after claiming bankruptcy
You could, in theory, wait seven to ten years until your credit bounces back post-bankruptcy to start your new business. If that is not an option, prepare to struggle financially if your business requires a lot of funding. Lenders might be uninterested in giving you a loan, but that does not exclude family, friends, investors, or potential partners. This is especially important if you have recently filed for bankruptcy.
A personal loan, like simply signing a loan contract to your parents or a joint venture with an established partner, will outline the specific parameters of how and when you plan to return the funds. In the meantime, this will provide you with the money to get your business off the ground (or onto the internet).
Separate Your Business from Yourself
Financial planning is critical in this step. If you have filed for personal bankruptcy and started your business afterwards, your business debt is excluded from your personal debt. It is easy to get it all wrapped up together moving forward, but try to keep business and personal separate.
There is a chance you might have to file for bankruptcy for your business in the future, as new startups statistically fail at a higher rate than established companies. When pursuing your business venture, prepare to remain thoroughly accountable and responsible for the financial accruement, especially with your credit falling to the wayside.
Businesses that Require Little Capital
With your finances tied, consider starting with a business that requires little out-of-pocket expenses. There are several small businesses that you can pursue with much less financial responsibility on your shoulders: consider your talents. Devoting yourself full time to craft making or making clothes, something you might have experience or skill can have a little financial impact if you buy products in bulk.
Consulting, cleaning houses or at-home salon care are all places to start thinking about where to start a business. Begin to think about how you can expand it after seven to ten years, and well beyond that. In this case, your filing for bankruptcy will have little impact on starting a business.
Solid Business Plan
Never underestimate the impact of a stable, clear and concise business plan. Consider what might lower the anxiety of (if necessary) potential investors; a new business is a significant risk factor in and of itself. If you can reduce that risk, it would be most beneficial for everyone involved. Display your potential for success as succinctly and detailed as possible: show your investors, your family, friends, and yourself that anything is achievable through X, Y and Z.
Follow through on the promises you make in your business plan and be realistic with yourself about how you intend to obtain the unachievable. If you have already claimed bankruptcy yourself, think about every possible outcome that will prevent you from having to do the same with your business. If you cannot think about every possible outcome, talk to other entrepreneurs who have claimed bankruptcy and bounced back.
Research & Obtain Necessary Permits
If necessary, set yourself up for success before your bankruptcy claim even gets in your way. Your bankruptcy does not affect any of the required permits or licenses you might need to start operating your business – this might also help you to expand your business plan. Contact your local government to inquire about essential business permits, and get yourself on the track to success before fear shuts you down. There is no wrong time to start gathering inventory either if you plan on selling products.
Prepare to Advertise and Market
Poor marketing skills transitions to poor management skills: you need to get your name out there before you are in dire need of customers. Word of mouth, online advertisement banners, car skins and decals: these are all ways to get your business out into the minds of potential customers. Depending on your financial situation, this is a place where you can conserve money by doing a lot of marketing yourself, but it will have a significant impact in the future. Build a good repertoire with the existing customers you already have, as this will make you stand out naturally.
Bankruptcy does not equal failure. You should have a realistic projection of where your entrepreneurial endeavour will take you, but do not let that fear of failing hold you back. The internet is a library of useful sources of people just like you who have accomplished great things. Although bankruptcy is the last option you should consider when swimming in debt, it does not mean your game is over.