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How to File Bankruptcy When You’re Self-Employed

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It can be incredibly rewarding to own your own business. It can also be costly – between marketing, payroll, and other overhead, you may find yourself struggling.

Add to that a couple of months where profits didn’t meet expectations, and you’re probably looking at significant debt. You may be weighing your options. While it’s possible to file bankruptcy when you’re self-employed or an independent contractor, it gets complicated when the line is blurred between your personal and business assets.

Here’s how bankruptcy generally works when you’re self-employed or own your own business:

Self Employed Bankruptcy & The Means Test

If you are self-employed, you are still able to file for Chapter 7 or Chapter 13 bankruptcy, just like any other consumer. However, it might be a little harder to provide your income according to the means test.

What’s a Means Test?

To file bankruptcy, you must be able to prove your average income for at least six months before filing. A means test is conducted by the bankruptcy court to determine if you qualify and, if so, which chapter best suits your need.

If your income falls below Ohio’s median family income, you automatically qualify for bankruptcy and don’t need to take the means test. To determine where your income falls, you can review the most recent U.S. Census data.

For those who do need to take the means test, the forms you fill out to determine your monthly income depend on which chapter you file: for Chapter 7, it’s Form 122A, and for Chapter 13, it’s Form 122C.

Monthly income is determined by averaging your income for the last six months. You can subtract your monthly debts from your income, like your mortgage, car payment, and other expenses, which leaves you with your disposable income. The more disposable income you have, the less likely you will qualify.

The Means Test for the Self Employed

For self-employed people, the means test is a bit more complicated. Regular employees can provide their pay stubs to show their income, and independent contractors should get a 1099 form. However, if you own your business and do not get a paycheck, you must rely on a different method.

Some supporting documents to prove your income could include:

  • Tax returns
  • Bank statements
  • Proof of payment receipts
  • Invoices and contracts

For Chapter 7 bankruptcy, you’ll need to provide two years of federal tax returns. For Chapter 13, you need to present four years of tax returns.

Chapter 7 vs. Chapter 13 for Sole Proprietors

If you are a sole proprietor, your business and personal debts are likely intertwined. Therefore, filing for bankruptcy means you need to list both personal and business income and debts.

If you qualify for Chapter 7 bankruptcy, your discharge could remove both personal and business-related debts. Chapter 7 could also be a good choice if you don’t have a lot of non-exempt assets to sell because you won’t lose too much of your property. Conversely, having several non-exempt assets means you may lose many of them since your trustee will need to sell them to pay some of your debt.

Chapter 13 bankruptcy can be a good option if you don’t qualify for Chapter 7 because it likely won’t cause much disruption in your business. Because you don’t have to sell any assets that could be vital to your business, you will be able to make monthly payments while you continue to operate.

But it’s important to ensure you have enough money to make your payments and still cover business expenses. Falling behind on your Chapter 13 payment plan puts you in danger of having your bankruptcy dismissed, leaving you back in the financial hardship you previously experienced.

Business vs. Personal Assets

Filing bankruptcy could mean liquidating some assets to help pay your debts, but your personal and business assets may be one and the same. For example, this would include personally owning tools or a vehicle and using them for work. Fortunately, Ohio has bankruptcy exemptions to help you keep certain property in both Chapter 7 and Chapter 13 bankruptcy.

The Role of an Attorney

You’re not required to work with an attorney to file for bankruptcy, but having help from a professional who knows bankruptcy law and can guide you through the process will help you avoid mistakes and costly delays. One incorrect calculation or documentation error proving your income could lead to your bankruptcy case being dismissed.

Your bankruptcy attorney can help you navigate the complexity of filing as a self-employed individual and make the best decisions for you and your business.

Contact a Cleveland Bankruptcy Lawyer for Help

If you are self-employed or an independent contractor and considering bankruptcy, contact experienced bankruptcy attorney Matthew Alden with any questions. Being your own boss is a dream come true, but it can leave you struggling to stay afloat.

Luftman, Heck & Associates will go over all the different chapters of consumer bankruptcy and help determine what debt relief option will work best for your personal and professional life.

Call (216) 438-9906 today to schedule your free consultation or visit us online.