Starting a New Business After Bankruptcy: 5 Rules on Successor Liability

No statute makes a former debtor wait before forming the next company, and the owners who assume otherwise tend to lose a year to a rule that does not exist. What the law supplies instead is a set of questions about where the new company's property came from, whether it is the old company under a different name, and whose promises survived the filing. Those questions predate the Bankruptcy Code. They are answered in documents.

The short answer to whether you can start a business after bankruptcy is yes, and it holds for an owner who wants to start a new business while a bankruptcy case is still open. The longer answer is the five rules below, each concerned with successor liability or its near relations: the doctrines that decide whether a creditor of the first company may collect from the second.

1. The Code Protects the Second Company More Than It Restricts It

Section 525(a) of the Bankruptcy Code runs in the owner's favor. A governmental unit "may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant" to a person who is or has been a debtor, under the text of 11 U.S.C. 525, "solely because" of the bankruptcy, the insolvency that preceded it, or the nonpayment of a dischargeable debt. The operative word is "solely." A licensing agency may still apply neutral financial requirements, and the section does not bind private lenders in their credit decisions.

Timing matters for the owner who files personally and opens something while the case is pending. In chapter 7, section 541(a)(6) excludes from the estate an individual debtor's "earnings from services performed" once the case has begun, so the wages an owner earns in a new venture after the petition are generally the owner's own. Chapter 13 reverses the arrangement. Section 1306 brings postpetition earnings into the estate, and the plan, the trustee's oversight, and counsel govern what the debtor may take on while payments run.

An owner may therefore begin again in the same month the petition is filed. The harder matter is what the new business is allowed to own.

2. Successor Liability Follows the Transaction, Not the Owner

New York states the framework in Schumacher v. Richards Shear Co., 59 N.Y.2d 239 (1983): the "general rule that a corporation which acquires the assets of another is not liable for the torts of its" predecessor, with liability attaching if "(1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations." The case concerned a product claim. Courts in New York apply its four exceptions in other settings, and other states keep their own versions, which is why the governing law is the first thing counsel will ask about.

Read the list again and notice what it omits. Common ownership, standing alone, is not one of the four; it is a fact a court may weigh under the third, alongside the customers, the equipment, the premises and the telephone number.

A bankruptcy sharpens the creditor's interest in that third exception. An LLC in chapter 7 receives no discharge at all, because section 727(a)(1) grants one only to individuals, so its debts are not erased; they remain attached to a shell with nothing left inside it. A funder holding an unpaid claim against that shell, looking across the street at a new company run by the same person out of the same storefront with the same delivery routes and a name that differs by one word, has every reason to plead continuation, and the plea becomes stronger with each piece of the old operation that crossed over without a documented price paid to someone entitled to receive it.

The new company in that position resembles a diner that repaints its awning and leaves the old health grade taped inside the window: the inspector reads the grade. A second company that bought what it uses, from the party entitled to sell it, at a price someone recorded, is a different creature from one that inherited its equipment by walking it out the back door.

3. The Old Company's Property Belongs to the Estate Until Someone Sells It

When the first company files, section 541(a)(1) places every legal or equitable interest the debtor held in property on the petition date into the estate. In chapter 7 a trustee is appointed to "collect and reduce to money" that property. The ovens, the trucks, the customer list and the receivables belong to the estate from the moment of the petition, not to the owner who used to sign for them.

The lawful path from the estate to the new company runs through the trustee. Section 363(b)(1) permits a sale outside the ordinary course "after notice and a hearing," and section 363(f) permits a sale free and clear of other interests when one of five listed conditions is met, among them the lienholder's consent or a price exceeding the aggregate value of all liens. Section 363(m) protects a good-faith purchaser if the approving order is later reversed on appeal, unless that order was stayed. An owner who wants the equipment in the new company can buy it the way any other bidder would. The buyer then holds a court order, which is worth more than the equipment.

The unlawful path is the one taken without asking. Section 549(a) lets the trustee avoid a postpetition transfer of estate property that the Code or the court did not authorize, and a transfer the owner arranged informally is the kind the section describes.

Outside bankruptcy the same instinct fails for a different reason. New York's UCC 9-315 generally continues a security interest in collateral after disposition unless the secured party authorized a disposition free of it. The lien travels with the machine.

4. The Guaranty Was Always the Owner's Own

Section 524(e) provides that discharge of a debtor's debt "does not affect the liability of any other entity on" that debt. The company's case, whatever chapter it proceeds under, leaves the guaranty where the owner's signature put it.

A funder with a judgment on that guaranty is a creditor of the owner, and the owner's interest in the new company is the owner's property, reachable by whatever means state law allows. The new company's own assets are a separate matter; in New York, Morris requires complete domination used to commit a wrong before the veil gives way, and domination "standing alone, is not enough."

5. The Year Before the Filing Will Be Read Closely

For an owner who files personally, section 727(a)(2) denies discharge where the debtor, "with intent to hinder, delay, or defraud a creditor," transferred or concealed property within the year before the petition. Section 548 gives the trustee a two-year reach for fraudulent transfers, and section 544(b) borrows state voidable-transfer law with its own lookback. Moving the best customers into the new LLC in the spring and filing in the fall is a sequence these provisions were written for.

And concealment from the trustee is a federal crime under 18 U.S.C. 152, punishable by up to five years. Whether any particular transfer crosses these lines is a question with an answer, though not one an article can supply.

Where a Settlement Review Belongs in the Sequence

Delancey Street negotiates business debt for a living, which is a different trade from law: the company is not a law firm, and petitions, courtrooms and successor-liability opinions sit outside its work. What it offers is a free, confidential initial review of merchant cash advance balances and the guaranties behind them, with legal matters coordinated through independently licensed counsel. For an owner whose first company has not yet filed, that review can come before the second company exists, while a negotiated resolution of the guaranty is still available. Where the old company is already in chapter 7 with a trustee in place, the equipment and the successor questions belong to bankruptcy counsel, and a settlement company should say so.

A new company is judged, in the end, by the property it can account for. The formation certificate proves only that the state received a filing fee.