Submitted by New Jersey Bankruptcy Lawyer, Lee M. Perlman.
When you’re in the trenches of a financial failure, filing for bankruptcy can feel like the end of the world. Your business has failed. You may feel like your career is over, like your life is ruined.
But if you take a step back, evaluate your situation objectively and make a plan, you’ll quickly realize that your situation is not as bleak as it feels right now. There is, as it turns out, life after bankruptcy.
In fact, a study conducted by small business bankruptcy researcher Aparna Mathur for the U.S. Small Business Administration found that many small businesses of fewer than 500 employees who file bankruptcy rebound into thriving and successful ventures within seven years after the bankruptcy.
The point of the U.S. bankruptcy code is to provide a fresh start to entrepreneurs, giving them an opportunity to recover from financial trouble and go on to develop successful businesses.
Let’s take a look at exactly what it takes for a business to bounce back from bankruptcy.
The Impact of Different Kinds of Bankruptcies
Exactly how and when your business filed for bankruptcy will change exactly how you proceed financially in the years to come. Let’s take a look at the three main types of business bankruptcy and how they impact the financial futures of their owners.
- If you filed for Chapter 7 or “liquidation,” your former business is no more. Now, you’re faced with starting a new business, and wondering how your past business failure will impact your new venture.
- Businesses that have filed Chapter 11 typically remain operational, but are dealing with the impact of working with a trustee to avoid further financial fallout. More often than not, this is the most complex and expensive type of bankruptcy a business can undergo, and the future of your company will depend tremendously on the direction of your trustee.
- Filing Chapter 13 is reserved for sole proprietors who are also filing for personal bankruptcy. This option is preferable for many sole proprietors whose personal and business finances are intermingled, because it can help you hang on to your personal assets.
Regardless of how exactly you filed for bankruptcy, your financial future is by no means doomed. You can still start a new business, or run your existing business, successfully. You can still work with vendors, apply for credit, and even obtain a business loan.
Each of these steps may be more complicated than before you filed for bankruptcy, but they are by no means impossible. And as time goes on, the consequences of your past bankruptcy will eventually become fewer and further between.
If your recent bankruptcy experience included a personal bankruptcy, you’ll need to pay particular attention to how this event impacted your personal credit score. Check with all three major credit reporting bureaus–TransUnion, Equifax, and Experian–and make sure your bankruptcy is accurately reflected on your credit reports.
No one is thrilled to show off a personal bankruptcy on their credit report, but it won’t last forever. When it comes to your credit reports, accurate is more important than flattering. So bite the bullet, make sure the information is correct, and do your best to stay above board with all creditors going forward.
Negotiating New Vendor Contracts
In your first several months of business after a bankruptcy, it will be easier to secure new contracts with suppliers than with bank lenders. Provided you maintained a good rapport with one or a few of your former vendors, they may be willing to work with you.
If you’re building new supplier relationships from scratch, start with smaller vendors first. Even if they check your business or personal credit history and see a past bankruptcy, a fellow small business owner will be more likely to empathize with your situation and give you a chance.
Keep in mind, your first several vendor contracts after a bankruptcy may come with certain provisions such as additional prepayment or deposit requirements. These are par for the course for any business with a shaky credit rating, and will likely fade as your business continues to rebound from the bankruptcy.
Once you have suppliers on board, make sure they report your status to Dun & Bradstreet–the primary business credit bureau. Over time this new, good credit will start to rekindle your business credit rating, helping your business become eligible for other types of financing.
Applying for Business Financing
There’s no sugarcoating the reality that trying to obtain new financing is one of the biggest struggles a business will face after a bankruptcy. The already competitive lending market for small businesses becomes even tighter when a negative credit history–especially one that includes a bankruptcy–is thrown into the mix.
If you’re planning to apply for new business financing, be aware that according to Mathur’s research, businesses who have filed bankruptcy in the past are twelve times more likely to be denied for a small business loan. You should also be prepared to pay between 1 and 1.6 percent higher interest rates than you otherwise would without the bankruptcy in your history.
That being said, obtaining financing is not impossible. Look into alternative forms of financing, such as a secured credit card, short term loans, peer to peer lending, or an SBA-backed microloan to fund your business comeback. While these options may be more costly and have more limitations than a traditional term loan, they will help your business get back on its feet in the years directly following your bankruptcy filing.
Making Every Payment On Time
At this point, every line of credit, vendor contract, or business loan you’re extended moving forward represents a second chance. It represents a lender or supplier who is aware of your bankruptcy, but is willing to trust you and work with your business anyway. Here’s the ugly truth: now, more than ever, it’s essential that you show that trust to be well placed.
Whether you’re still paying old debts, or working with new creditors, every single payment going forward needs to be in full, on time, every time. Set up a standardized accounts payable process for your business that you can follow to the letter, and regularly check and re-check your cash flow statements to make sure nothing falls through the cracks.
Leaving the Past Behind
Dealing with a bankruptcy in your credit history is by no means a pleasant way of doing business, but keep in mind it won’t last forever. The Fair Credit Reporting Act specifically stipulates a bankruptcy can stay on your credit report for a maximum for ten years–though personal bankruptcies often disappear after seven.
Right now, seven to ten years may seem like a long time. But as you put one foot in front of the other to rebuild your business, that time will pass quickly, and creditors will care less and less about your past bankruptcy.
Going through a personal or business bankruptcy may feel like a failure. But in many ways, it’s actually an opportunity to turn over a new leaf. You have the ability to replace your past negative credit history by building a reputation of strong financial management and creditworthiness. Continue doing everything you can to rebuild your credit. Commit to paying your bills on time, every time. Eventually, the ugliness of dealing with a personal or business bankruptcy will fade into a distant memory.