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Running A Startup Business While Filing Personal Bankruptcy


Run your business while filing for personal bankruptcy.

When times are tough for startups and small businesses, their owners can get hit hard financially. Those who pay themselves a small salary from their company's payroll can no longer afford to do so. Those who put all business profits directly back into the business, might no longer be able to cover basic expenses and utilities such as a home office. Many turn to personal bankruptcy rather than liquidating their small business to give it a fighting chance.

The reason for such a move generally lie in the fact that while your personal financial standing will take a dive, the small business is a legal and separate entity unto itself and doesn't have to be shut down or liquidated. If you're in a position as a startup business owner to file for personal bankruptcy, you can rest assure knowing your business will be safe as long as it remains a separate entity with it's own federal tax id number. This includes S and C corporations, Partnerships, and Limited Liability Companies. The exception falls within a Sole Proprietorship. Unlike other business entities, a sole proprietorship uses it's owner's social security number as its business id and is therefore viewed as an asset eligible for possession by creditors in a personal bankruptcy case.


You can and should continue operating your business as usual while filing for personal bankruptcy. Your creditors' only concern is whether you receive a personal income from that business (Learn how to earn income while trying to fund your startup). If you do, that income can completely be awarded to creditors to pay your outstanding debt or a portion can be garnished in a bankruptcy court judgement.


Is it possible to get a startup business grant or other funding while in bankruptcy?

The answer is yes. Unlike business loans which require certain degrees of good credit and collateral, grants and other startup business funding sources focus more on the business idea and its potential to create a return on investment. If you have a great business idea with solid customer or user interest, your chances of landing grants or other investment money are still realistic.


When filing for personal bankruptcy as a business owner, you'll generally be required to submit much more business related documents. A federal trustee will be appointed on behalf of your creditors and they will have done a background check into your financial history and any assets or businesses you have listed on public record.


Can you start a business while in bankruptcy?

You can start a business while in bankruptcy but any good bankruptcy attorney would advise you not to. That would simply complicate your case. Your goal is to clear your debts and keep and protect your business assets. A new registered business might not be declared on your bankruptcy filing for protection, allowing your creditors to go after it. It's best to start a new business after you've been discharged from chapter 7 or chaper 11 bankruptcy.


Items you must declare and submit to your bankruptcy lawyer

  • Business and personal tax returns for the previous 3 years from the date you're filing bankruptcy.
  • All statements of personal income spanning about 1 year (W2, Government assistance receipts, Alimony, Inheritance, Life Insurance, etc.)
  • Previous 9 to 12 months of business and personal banking transactions. The most updated banking statements will be requested as time progresses during the case.
  • Names of individuals (If any) who give you regular financial assistance.


Blog posted from New York, NY, USA View larger map
Co-Founder of Erookie and startup business expert. Author, mentor, speaker, and small business owner.


  • Guest
    Merle 819 Saturday, 23 July 2011

    The only thing that really sucks about doing personal bankruptcy is the fact that it stays on your record for seven to ten years, depending on which one you file. A chapter seven which is better in my opinion stays on your credit history for seven years and a chapter 13 stays on for 10 years. I mean if your business is booming thats great, you really won't have to worry much about financing things. But if you're still a small struggling startup you still have to make money somehow such as a side 9 to 5 job and many of those check your credit history to see your standing.

  • Guest
    lorene clemens Saturday, 23 July 2011

    Too many people get discouraged and think that bankruptcy is the end of the world when it's really not. It's actually a great thing especially if you're a business owner. One thing they tell you is to not carry a great burden of debt when you have a startup business or small business. The bankruptcy actually clear that problem out the way and allow you to focus on building short term profit and long term revenue for your company. As long as you don't run the business as the sole owner (Sole Proprietor) then you should be OK.

  • Guest
    Teddy Barber Saturday, 23 July 2011

    I filed for chapter 13 bankruptcy two years ago and today I'm doing OK. I no longer have the load of debt I did before and I can focus on running my small business instead. It's still not making an absurd amount of revenue but it's doing pretty well considering I service a local region in south Texas. I build sheds and my clients are pretty loyal and give me referrals. I can't complain. The economy might have given me a hit personally but my business is afloat and I'll be OK.

  • Guest
    Frederick B Sunday, 24 July 2011

    Filing for bankruptcy is a big decision but not filing could be way more detrimental to your financial well being. Those creditors never stop and the interests on the debt just keeps piling up. I'm thinking about it. I just started a business 4 months ago and it's nowhere near profitable, but i want to make sure it's safe during the whole bankruptcy proceedings. I've worked too hard to try to make somethng out of this American dream to have it taken away. But from what you're saying it seems the business itself sholud be OK, it's not a sole proprietorship, it's a limited liability company with its own tax id and me being the single owner.

  • Guest
    Susan Sunday, 24 July 2011

    It never hurts to start fresh and bankruptcy is a good way to get rid of those pains and headaches caused by massive debt. Starting a business or growing one requires your full attention and commitment. You can't do that if you're worried sick about creditors coming after you or your interest in a business. You really don't have to worry about your business getting taken away though as long as you didn't liquidate your interest in the company.

  • Guest
    alex- vargas Monday, 25 July 2011

    What I hate is receiving some surprise bill from a creditor that somehow missed the bankruptcy proceeding. This happened to me two years ago, right after got discharged from chapter seven bankruptcy, some greedy creditor sent me a bill through a collections agency like four years later. All that time they were just sitting on it, while it could have been submitted into the bankruptcy case. Needless to say I had to pay it, just didn't want to deal with another annoying company who could care less about the well being of a former customer in a terrible economy.

  • Guest
    Marc Tuesday, 25 October 2011

    I understand it has been months since you posted this, but what judge told you that you had to pay this bill? You don't have to pay a bill just because someone talks smart and bossy on the phone. Depending on what state you live in, bills over 2-4 years old may be beyond the statute of limitations. People - you need to start learning more about your rights. Start with the FCRA. These laws were written for your protection - read them!

  • Guest
    Salvatore Wednesday, 26 October 2011

    Marc are you kidding me??? I seriously feel like bashing my head against my desk right now. I'm in this same exact situation living in the state of Florida. I received back in July a bill that originated back in early 2008. I forwarded the medical bill for about $1800 to my health insurance company who gave me assurance that it would be taken care of. I assume everything was OK, there were no subsequent calls or letters from the creditor between 2008 and 2011 for any outstanding balance. But to my surprise three and a half years later in July 2011 I got a letter from a bill collector representing the creditor that I still owe over $300 dollars. I was totally blindsided since I knew nothing about this, it wasn't even present on my credit reports spanning these three years. Should I be paying for this or has the statute of limitations expired for this? I have no clue but I really don't think I should be paying for this.:(

  • Guest
    Lance Thursday, 18 August 2011

    Kudos to those who can pull this off. I know quite a few people who buckled under pressure and stress and totally gave up running their business because going through a bankruptcy was too much for them to bear.

  • James
    James Sunday, 07 October 2012


  • Guest
    James Sunday, 07 October 2012


  • Guest
    James Sunday, 07 October 2012

    I have been in Ch 13 for 3 yrs with 2 yrs left. I am currently discussing partnering with guy to start a company. We are in the talking phase, and it looks like we have an excellent chance to partner up. I'm afraid my 13 will kill our ability to receive startup capital. I also know I should discuss this issue with him now. Is it possible to kick off a business and be in 13? Any suggestions on how to participate but keep company where it can receive startup capital, govt funds, etc? Thanks

  • Guest
    File bankruptcy Tuesday, 08 October 2013

    This is so challenging for you, I suggest that the more knowledgeable you are, the more you can be sure that you are making the right decision and that you are taking the right steps to ensure your personal bankruptcy goes as smoothly as possible. and you should seek first the best attorney for your financial advice.

  • Guest
    Krystal Wednesday, 05 February 2014

    I am very overjoyed that I got to find this website and see all of the honest clear opinions of those who have gone through the process of managing a business and filing for bankruptcy I appreciate it so much.

    Reply Cancel
  • Wade Nembhard
    Wade Nembhard Wednesday, 05 February 2014

    Krystal I'm glad you found us and even more glad that our readers comments and experiences are helping in your decisions. Bankruptcy is never the end financially or business-wise but can be a chance to start over and grow a business bigger and better. Thanks for subscribing to Erookie :-)

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