Key Findings:

• Nearly 450,000 Americans filed for bankruptcy in 2023, and there were nearly 19,000 business bankruptcies the same year. 
• Americans are also starting businesses in record numbers, with over 21 million businesses started over the past four years.
• Bankruptcy will create challenges for starting a business, but does not have to stop entrepreneurs who are passionate about launching their business. 

“I love entrepreneurs,” says San Francisco bankruptcy attorney Cathy Moran. “They are the most optimistic and hard working folks I encounter as a bankruptcy lawyer.  Even the once-unsuccessful are primed to try again.”

She is adamant that bankruptcy does not have to stop you from starting a business: whether it’s your first business, or your next venture. “The short answer to the question of whether bankruptcy law prevents you from starting a business is no, it does not,” she says. 

That doesn’t mean it won’t be challenging. Funding a business and handling the financial challenges of a new business aren’t easy even when your finances are strong. It can be harder when you’re recovering from a financial setback. 

If you have filed for bankruptcy in the past few years, or are thinking of doing so, and want to start a business, here’s what you need to know. 

Types of Personal Bankruptcy 

Here’s a quick overview of the main types of personal bankruptcy:

Chapter 7 bankruptcy

Sometimes referred to as “straight bankruptcy” or “liquidation”, this type of bankruptcy often eliminates most or all unsecured debts and can be completed in a few months.  Most people can keep basic necessities through “exemptions”, or property you get to keep. The court appoints a trustee to sell non-exempt assets to pay creditors.

Moran notes that most Chapter 7 bankruptcies “are ‘no asset’ cases where the trustee closes the case without taking possession of any assets.”

Chapter 13 bankruptcy

Often referred to as “reorganization”, you enter a structured repayment plan lasting 3-5 years to pay back some or all debts. This option allows you to keep some or all assets while paying certain debts.

Types of Small Business Bankruptcy

Filing for bankruptcy if you’re a small business owner can be confusing. Many Americans operate their businesses as sole proprietors, which means there is no legal separation between their personal and business finances. That means that filing for bankruptcy will have an impact on both your business and your personal finances. (More on that in a moment.)

If you operate a business through a business entity, such as an LLC or corporation, though, you and the business are separate legal entities and you may be able to file business bankruptcy, personal bankruptcy, or both. 

Keep in mind that if you sign personal guarantees for business accounts (they are common with business credit cards, for example), lenders may still try to collect from your personal assets or income (as allowed by law) if the business doesn’t repay the debt. 

Chapter 7 bankruptcy (Liquidation)

The business almost always closes down. A trustee sells business assets to pay creditors. 

Chapter 11 bankruptcy (Reorganization) 

The business continues operating while restructuring debts. This type of bankruptcy can be expensive, and is mainly used by larger companies. However, Subchapter 5 of Chapter 11 is an option for smaller businesses to restructure debt. 

Chapter 13 bankruptcy 

Available to sole proprietors since the business and owner are legally the same entity,  it allows you to keep your business operating while debts are paid back, usually in a 3-5 year plan. 

“The more complex the business, the more important that a debtor in Chapter 13 should at  least notify the trustee of the new operation,” Moran says. “Know, too, that court approval is necessary to incur new debt or to sell significant assets while in Chapter 13.  Thus the practical check on a new business may be the business’s cash needs.

“The fate of an existing business in the Chapter 7 bankruptcy of an individual depends on the legal form of the business and the sale value of the business.  (Chapter 13 expressly contemplates that a debtor can continue any business he was running at the commencement of the case.) 

“As a matter of law, sole proprietorships are not free-standing legal entities but just assets of the individual operating the business,” explains Moran.  “Chapter 7 trustees routinely expect debtors to close their proprietorship businesses if continued operation exposes the bankruptcy estate to liability for debts or injuries going forward.” 

Learn more about business and bankruptcy on Moran’s website, Bankruptcy in Brief. 

How Bankruptcy Affects Credit

Under a federal law, the Fair Credit Reporting Act (FCRA), personal bankruptcy may appear on credit reports for as many as ten years after the date of filing. Credit bureaus generally stop reporting completed (discharged) bankruptcy seven years after the filing date. 

The FCRA does not apply to business credit reports, though. There is no limit on how long bankruptcies can be reported on business credit reports. 

Bankruptcy is considered a high risk factor, which means it will have a significant impact on credit scores—either personal credit scores, or business credit scores, depending on the type of bankruptcy filed. 

While bankruptcy filing listed on your credit history will likely hurt your credit scores, keep in mind many people who file for bankruptcy have already seen their consumer credit scores drop due to debt, late payments, charge-offs, or collection accounts. 

Bankruptcy may be the bottom point of a downward spiral, giving you the fresh start you need to start rebuilding your credit and perhaps a new business after bankruptcy. 

How to Start a Business In or After Bankruptcy

First, Moran explains that “It is a misnomer to say that one is ‘in bankruptcy’ when you’ve filed Chapter 7. Rather than a legal process, Chapter 7 is a line in the financial sand that separates your pre-bankruptcy financial life from your post-bankruptcy financial life. 

“The day after you file, you are free to conduct your economic life as you choose.  The only legal restraint is that you can’t use assets you had when you filed to fund a new business until your claims of exemption are final and the Chapter 7 trustee indicates whether turnover of any non-exempt assets is expected.”

As mentioned earlier, if you operate your business as a sole proprietorship, without a formal business structure, you and your business are not legally separate entities and so if your business is failing, you may not be able to keep your business if you the bankruptcy trustee determines it would risk funds that could be used to pay creditors. 

That’s another advantage of forming a business entity, such as a limited liability company (LLC) or corporation: a business failure doesn’t necessarily involve your personal finances, or vice versa.  

“Businesses that are incorporated or owned by an LLC are separate and distinct from the individual who owns the entity.  Thus, the bankruptcy of the owner of the entity doesn’t draw the business itself into bankruptcy,” Moran shares. 

“What the bankruptcy trustee gets is the stock in the corporation or the membership in the LLC.  That ownership is valuable only if the liquidation of the business and payment of the business debts would yield a meaningful sum.” But, she adds, that stock or shares are not typically worth anything to creditors.  

She often recommends her clients who have small businesses and are contemplating bankruptcy to “incorporate before filing Chapter 7 or file Chapter 13”.

“My advice to anyone starting a new business, whether or not they’ve filed bankruptcy, is to make a financial plan,” says Moran. “Budget realistically and be sensitive to the cost of credit. Business success is more than just making minimum payments on high cost credit.”

Business partners can also drag a business or even an individual into bankruptcy, so choose wisely. Whether it’s a business partner who goes on a spending spree, or just makes terrible decisions, you could find yourself struggling to pay business or personal debts due to your business partner’s actions. Choose carefully and do what you can to protect yourself. 

“If you pool your money with others to go into business, get your business relationship committed to paper in advance of actual operations so the rights of the owners are laid out before they become a bone of contention,” urges Moran. 

Also keep in mind that if your business partner has bad credit, it may be harder to get small business financing. Many small business loans, including bank loans and many SBA-guaranteed loans, require personal credit checks of all owners with more than 20% ownership in the business. A low FICO score could mean rejection for financing.

If you want to start a business but are struggling financially and may not be able to pay your debts back in full, always consult a bankruptcy lawyer who can walk you through your options. Make sure you discuss your desire to start a business with the attorney. 

Bankruptcy Terms

Here are the common terms you’ll come across if you are researching bankruptcy:

• Bankruptcy Court – The federal court that handles bankruptcy cases. All bankruptcy proceedings must go through this specialized court system, which has its own judges and rules.
• Bankruptcy Code – The federal laws that govern bankruptcy, found in Title 11 of the United States Code. Each type of bankruptcy (Chapter 7, 11, 13) has specific sections with rules and requirements.
• Means Test – A formula used to determine if you qualify for Chapter 7 bankruptcy. It compares your income to your state’s median income and examines your expenses to determine if you have disposable income to pay debts.
• Discharge – The court order that releases you from personal liability for certain debts. After discharge, creditors cannot legally attempt to collect on the discharged debts.
• Automatic Stay – A legal protection that immediately stops most collection actions when you file bankruptcy, including foreclosures, repossessions, and collection calls.
• Trustee – The court-appointed person who oversees your bankruptcy case, reviews documents, sells assets in Chapter 7, or manages payments in Chapter 13.
• Exemptions – Property you’re allowed to keep in bankruptcy. Each state has different exemption laws protecting certain assets like homes, cars, or retirement accounts.
• 341 Meeting – Also called the “meeting of creditors.” A mandatory meeting where you answer questions under oath about your finances and bankruptcy papers.
• Secured Debt – Debt backed by collateral, like mortgages or car loans. These debts are handled differently in bankruptcy than unsecured debts.
• Unsecured Debt – Debt not backed by collateral, like credit cards or medical bills. These are typically discharged in Chapter 7 bankruptcy.

Rebuilding Your Credit After Bankruptcy

You can rebuild credit after bankruptcy, and the more proactive you are about the process, the more likely you will see positive results. But it will take time. 

Keep in mind that business credit reports and personal credit reports are separate. If your business files for bankruptcy, but you do not file for personal bankruptcy, the business bankruptcy case won’t appear on your personal credit reports. 

Also note that while you rebuild your credit (whether that’s business credit, personal credit, or both), you will probably pay higher interest rates, get lower credit limits, or both. You may find it harder to borrow, and that means you’ll want to carefully develop a business plan to minimize spending. The type of business you choose will be important: you may want to choose a business with lower liabilities and expenses, and higher cash flow potential. 

What if your business files for bankruptcy and you then start a brand new business? 

While the new business will have its own credit report, commercial credit reporting agencies will often alert companies that purchase credit reports to the connection between the two, so that lenders or vendors will better understand the risk of extending new credit. And credit applications may ask whether you have filed for business previously. 

Read: How To Build Business Credit With Bad Personal Credit

Steps for Rebuilding Credit After Bankruptcy

As soon as your bankruptcy is completed (discharged), you can start the credit rebuilding process. 

Your main goal, whether you are trying to build personal or business credit, is to get accounts that will appear on your credit reports, pay them on time, and keep debt low. As time goes on, these positive references can help boost your credit scores. 

Credit Building Options

Secured credit cards: make a deposit to secure the account, to be returned when you close the account. There are more secured card options for personal credit, but they are available for building business credit too. 

Find business secured cards here. 

Charge cards: these cards require payment in full and may have low credit limits. Not all cards are available if you have bad credit, so look for cards specifically designed for credit building. 

Find business charge cards here. 

Credit builder accounts: With these accounts, you make payments toward a savings account, and those payments are reported to credit bureaus. It combines savings with credit reporting. These accounts are available in versions for individuals as well as businesses. 

Find credit builder accounts here. 

Net-30 accounts: Some suppliers offer credit to purchase services or supplies on a 30-day basis. Net-30 terms give the business thirty days to pay. When these tradelines are reported to business credit bureaus and paid on time, they can help build business credit. 

Find net-30 accounts here. 

Monitor Your Credit

Check your credit reports on a regular basis to monitor your progress toward building credit. With Nav Prime, you can check, manage, and monitor your personal and business credit, and your Nav Prime subscription is reported as a tradeline to major business credit bureaus. 

The Bottom Line: Business After Bankruptcy

Bankruptcy offers vital debt relief for individuals and businesses. And while it can be a financial setback, it doesn’t have to stop you from starting a business. 

Walt Disney, George Foreman, Henry J. Heinz, Henry Ford, PT Barnum, and Milton Hershey are examples of business owners who started successful businesses after bankruptcy.

If you want to start a business before or during bankruptcy, be sure to talk with a bankruptcy attorney. After your bankruptcy is completed, you can focus on rebuilding credit while you get your business off the ground. You can work on your business credit and personal credit at the same time, often independently of each other. 

Nav can help. With Nav you can build, manage, and monitor personal and business credit in one place. Track your cash flow with Cash Flow Health. 

Frequently Asked Questions

Can you start a business after declaring bankruptcy?

Yes, you may be able to start a business after bankruptcy. While bankruptcy affects your personal credit and will create some initial challenges, it doesn’t legally prevent you from starting a new business. 

Your bankruptcy discharge papers serve as proof that your old debts have been resolved, which can be important when setting up new business banking relationships. While it may be difficult to get traditional business loans, you may be able to get vendor credit, revenue-based financing, or partnership arrangements. 

Many successful businesses have been launched post-bankruptcy by focusing on business models that require minimal initial capital or by building strong relationships with suppliers willing to extend trade credit.

Can you have an LLC after bankruptcy?

Yes, you can form an LLC after personal bankruptcy. A personal bankruptcy doesn’t restrict your right to form a new business entity. In fact, forming an LLC might be a smart strategy after bankruptcy because it establishes a clear separation between personal and business finances. This separation becomes especially important when rebuilding financial credibility.

The LLC can establish business credit, and business credit reports won’t list personal bankruptcy, though personal credit can still matter if your business tries to get certain types of business financing. 

You’ll need to follow all standard LLC formation requirements, including registering with your state, getting necessary licenses, and following corporate formalities. Consider working with a business formation attorney to ensure proper setup, especially given the previous bankruptcy.

Can a business stay open after bankruptcy?

Whether a business can remain open after bankruptcy depends entirely on the type of bankruptcy filed. With Chapter 7 bankruptcy, the business may close, though not always. Under Chapter 11 or Chapter 13 (for sole proprietors), a business usually continues operating while restructuring its debts.

For businesses filing Chapter 11, particularly under the newer Subchapter V designed for small businesses, operations can continue under court supervision while developing a reorganization plan. The business must show it can operate profitably after restructuring and meet its new payment obligations. Many businesses successfully emerge from bankruptcy and continue operations.

Can I file bankruptcy and keep my small business?

The ability to keep your small business while filing bankruptcy depends on several factors: the type of bankruptcy filed, your business structure, and whether you want to maintain ownership or operations. 

Sole proprietors filing Chapter 13 bankruptcy can often keep their business operating if they can maintain payment plans. For incorporated businesses, Chapter 11 (especially Subchapter V) specifically allows for continuing operations while restructuring debts.

If you file personal Chapter 7 bankruptcy and own a corporation or LLC, you might be able to keep the business if it has value beyond your exemption limits and you can work out an arrangement with the trustee. However, if you’re a sole proprietor filing Chapter 7, the business assets become part of the bankruptcy estate. 

Working with a bankruptcy attorney with expertise in business cases is crucial for understanding your specific options and developing the best strategy for your situation.