MT Expert - Finance: Bouncing back from bankruptcy

The number of SMEs going to the wall may have fallen, but what if you were one of the unlucky ones?

Last Updated: 31 Aug 2010

What does it take to bounce back from bankruptcy and start another business? Mark Davis, an ex-bankrupt who has gone full circle to become a bankruptcy adviser, explains.

After a bankruptcy order your business will usually be closed and any employees be dismissed.  But it’s not necessarily the end: bankruptcy does not mean that you are forever prohibited from starting a business. In fact, you can actually start a new business the day after you have a bankruptcy order made against you. Nonetheless, there are implications that you will need to bear in mind.

As with any start-up, a preliminary step is to make sure that you identify and assess any risks associated with the venture. This is more crucial when you and your family may have already endured the stress and uncertainty of a failing business and a subsequent bankruptcy.

Once you’ve decided you’re ready to push ahead with the new business, you may want to take a few minutes to consider the implications of the bankruptcy on your new venture. A bankruptcy may introduce weaknesses, threats or barriers that you will need to recognise from the outset – but on the plus side you have a better chance of spotting these as a result of your previous experiences.

The good news is that tools, vehicles and other items of equipment used by you personally in your business are exempt from the bankruptcy estate. This can be handy for many self employed trade persons who rely on tools for their livelihood.

Bankruptcy restrictions apply from the date of the bankruptcy. So after this date, you cannot borrow more than £500 without informing the lender of your bankruptcy. You cannot trade under a different name from that in which you were made bankrupt without informing others of the name in which you were made bankrupt. You cannot be a director of a limited company without the leave of the court. These restrictions will apply until you are discharged from bankruptcy, usually automatically on the first anniversary. However, if you are found to have been reckless or blameworthy then these restrictions may be extended for between two and 15 years.

It will come as no surprise that bankruptcy affects your credit rating - a footprint of the bankruptcy remains on your credit report for a period of six years. And although there is less of a stigma attached to bankruptcy these days it may still affect business relationships. Doing business with new organisations or new associates who learn of your bankruptcy may prove challenging, although hopefully existing contacts may be more likely to cut you a bit of slack, especially if you have a good relationship with them prior to the bankruptcy.

As a bankrupt you may be prohibited from certain professions or from applying for particular licenses or memberships. It is always worth checking whether this will affect your business. But this doesn’t last too long - rarely does this prohibition continue after discharge providing that your restrictions have not been prolonged.
Consideration should always be given to provisions in law relating to property that you acquire during the bankruptcy. You will be required to furnish the trustee in bankruptcy with information about the business not less than once every six months during the bankruptcy. The outcome of this could be that you have to hand over any surplus stock or surplus income. As such, to avoid these provisions it is safest to launch a business following your discharge from bankruptcy.

There are similar provisions relating to income. If your income is an amount beyond that required for the domestic living needs of you and your family then you may have to pay over a specified amount for a period of three years. This can only be ordered prior to your discharge from bankruptcy.

A bank account may prove difficult to obtain. The majority of high street banks will not provide a business account to a bankrupt. However there will be more options once you have been discharged.

The above implications should give you plenty to consider during the planning stages of your business. They may present some challenges for you to overcome but they need not prevent you from succeeding. Remember, business is full of challenges. It is overcoming these challenges that lead us to success.

Due to the legal considerations involved in starting a business, particularly with the complications of a bankruptcy, you should always seek professional advice. You will need to consider the legal structure of your business wisely and the timing of your launch will be important too. Now there’s some food for thought. 

Mark Davis is the founder of Piggy’s bankruptcy advice website

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