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Can I Start a Business While in Chapter 7 in 2024?

Yes. There is no law that restricts you from starting a new business after or while in Chapter 7. Keep in mind that starting a new business post-bankruptcy or while in Chapter 7 will be a daunting task but it is not impossible. We all learn from experience and it is very possible you have picked up one or two from your previous situations. Howbeit, note that your biggest challenge will be getting credit.

Liquidation under Chapter 7 is a well-known form of bankruptcy. It is open to persons who are having issues attaining regular, monthly payments toward their debts.

Enterprises who are looking to terminate their enterprises might as well decide to file Chapter 7. Chapter 7 offers succor to debtors regardless of the amount of debts owed or whether a debtor is solvent or insolvent. A Chapter 7 Trustee is put in place to change the debtor’s assets into cash to be shared among creditors.

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To genuinely leverage bankruptcy laws and get a fresh start, it is vital that you do not continue to incur extra debt. Establishing a business is daunting, but starting a new business from scratch after filing for bankruptcy can really be more daunting.

Nothing is as stressful as bankruptcy. Your income and every asset you own are taken into consideration for evaluation. Once the legal evaluation is done, you’ll get your discharge or dismissal. But this is more or less the beginning of the journey.

Note that Chapter 7 makes it possible to kick-start a new venture and keep your debts behind you. You might very well have to deal with a whole lot of issues since you are establishing a business after bankruptcy. Howbeit, it is possible to start or establish a business the very same day you file for Chapter 7 or even after it has been discharged.

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The bankruptcy court expects you to earn a livelihood even within the period of the hearing. Owing to that, you can establish a business or take part in other forms of self-employment.

Implications of Starting a Business While in Chapter 7

Just like it was noted above, there are no laws restraining you from starting a business while in chapter 7; however, there are implications you will need to take into consideration. They include;

  1. Business Debt

You will find it hard to get approval from the bankruptcy court to accrue additional debt to begin your new business. This is because bankruptcy filing illustrates you require help dealing with debt and credit, and the last thing the court wants is for you to accumulate extra debt while looking to do away with an already existing one.

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You’re more or less mandated to check with the court all through your bankruptcy prior to taking on debt; inability to do so will give rise to your bankruptcy being dismissed.

  1. Credit Approval

It is also almost impossible for a creditor to loan you money for a new business if you already have a fresh bankruptcy on your record. Keep in mind that being in Chapter 7 entails that all your assets, including your home, are attached to the bankruptcy proceedings.

It also entails that all those assets can’t be pledged as collateral for a loan. Nevertheless, you can choose to go for a lender that specializes in borrowers with bad credit.

  1. Bankruptcy Discharge

Most often, it is recommended you wait to open a business until after your bankruptcy has been completed, or discharged. Chapter 7 bankruptcy, just as it was noted above, is a well-known form of bankruptcy and can be completed in a couple of months.

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Immediately the bankruptcy is over, you’re free of court oversight and this means that you have as much credit as creditors approve for you.

What Does the Law Say About Starting a Business While in Chapter 7?

In the United States, the Law permits you to start and manage a business all through the bankruptcy period; however, you will have to be aware of certain guidelines. It simply entails that if you are a self-employed HVAC professional who has declared bankruptcy, you could still continue to operate your business while bankrupt. However, your business will be expected to conform to some obligations:

  • Your business name will need to include, your full name, enabling customers, partners, and other stakeholders. Note that you can modify your business name to meet this guideline if you choose to do so.
  • If your business name fails to inculcate your name, you are mandated to let people you do business with know that you are bankrupt.
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Also note that all through your bankruptcy, you might be required to make compulsory payments towards reimbursing your creditors. The exact sum you are expected to pay will depend on a wide range of factors, such as your annual income and the number of dependents you are responsible for.

Steps to Starting a Business While in Chapter 7

While it is possible to start a business while in Chapter 7, keep in mind that it isn’t an easy feat. Nevertheless, below are vital steps to guarantee success.

  1. Evaluate the risk factors

There are risks and implications that come with starting a business in Chapter 7. For instance, you might have specialized skills in a precise industry or product.

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After or during bankruptcy, you might want to stick to your expertise and begin a business you know very well. However, this isn’t always a good idea. If you attempt to start a business in the same line as your old one, you might have to deal with allegations of fraud.

Keep in mind that your previous business’s creditor will be able to collect debts owed by that business from your new one. As such, it is recommended you reach out to an attorney regarding your situation and discuss the risks.

  1. Keep the entities separate

It is possible for a business owner to file for individual bankruptcy at any point the business firm nosedives. Entrepreneurs in this modern age tend to declare personal bankruptcy in order to discharge their personal liability towards business debt.

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More often than usual, the owner is a sole proprietor or partner in a failed partnership or signed on behalf of a limited liability company or corporate entity. As such, it is imperative you establish a separate entity for your new venture, like a corporation or a limited liability company. The essence of this is to leverage the liability these types of companies offer.

  1. Seek ways to handle funding issues

If there is a need to get external funding to start this new venture, keep in mind that banks and other lenders will want to know about your personal credit history. After filing for bankruptcy, it can be quite challenging to convince them to give you funding with your poor credit and negative financial condition. Howbeit, there are certain strategies to help boost your chances of approval.

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First and foremost, put together a well-detailed business plan, get a business partner with good credit, apply for financing from a small community bank, reach out to investors to fund your business, or seek financing and grants provided to businesses by local communities.

  1. Obtain new Tax or Employer Identification Numbers

It is important you get new tax or employer identification numbers for establishing this new business, especially if:

  • Your previous business was a sole proprietorship and was attached to your personal bankruptcy
  • If you previously filed for Chapter 7 bankruptcy and liquidated a corporation or limited liability firm

Howbeit, note that under Chapter 7 bankruptcy, a corporation or a limited liability business isn’t permitted to be discharged. The debt is more or less owed by the company. Owing to that, if you re-establish the business or start a new one under a different name, creditors are still permitted to chase you for a debt that wasn’t completely discharged.

  1. Pay your business taxes

One thing to note is that tax debt is non-dischargeable, and this simply entails that you still owe it even if you declare bankruptcy. When starting a business after bankruptcy, one of the vital things to keep in mind is to make provisions for paying your business taxes. Establish a viable business budget that will deal with all your business tax obligations on time.

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There is no law that restricts you from starting a new business after or while in Chapter 7. Bankruptcy does not entail you are finished or can no longer attain business success. The best approach is to evaluate your situation and look towards confronting your problems head-on with extensive, cost-cutting solutions that will ensure that you can reclaim your credit and trust.