Can You File for Bankruptcy While Self-Employed?
Is it possible to declare self-employed bankruptcy while working for yourself?
Some assume bankruptcy isn’t available to the self-employed, but independent contractors, gig workers, sole proprietors, and freelancers can file for Chapter 13 bankruptcy or Chapter 7.
If you operate a corporation or LLC and are struggling with personal or business debt, you may be able to declare bankruptcy for the company itself.
Before deciding, consult a bankruptcy lawyer to guide you through the process and maximize your outcome..
How Can You Prove Your Income When Filing for Bankruptcy?
Recording self-employment income isn’t difficult if you keep accurate books. Even with limited or outdated records, reporting irregular income is not as difficult as you may imagine. This is because most self-employed people do not rely solely on cash transactions.
Depending on how you are filing, you will be required to show a certain number of years (from 2 to several) of your required tax returns. Additionally, you should show your business statements and bank account, as well as business receipts.
Why is it necessary? Well, this aids the bankruptcy court in figuring out how much regular income you make overall. Below are the documents you need to prepare and show when proving self-employment income:
- 3 years of contracts, invoices, records of cash payments, and other business receipts (particularly for expense and payment transactions that are not shown on your bank statements).
- 3 years of both business and personal bank account statements
- 4 years of tax transcripts or federal tax returns when it comes to Chapter 13, or 2 years when you file for Chapter 7 bankruptcy
Remember that the chapter 13 trustee appointed to oversee the case will require copies of some of the documents you organize. If you haven’t already, you will need to use your documents when creating profit and loss statements.
How to Prepare and Create Profit and Loss Statements
Ideally, hire an accountant to prepare your company’s profit and loss statements. If you don’t have an accountant, you can create these statements yourself. Making a comprehensive financial history is the aim. It is meant to display both the earnings you made and the costs you incurred while operating a business.
Although creating these statements isn’t difficult, it is best to hire an accountant to do it for you. The first step will be to recreate your financial history using the documents mentioned above.
While many trustees request monthly and annual profit and loss statements for two years, you should confirm what is customary in your community. So, how to do it?
The simplest method is to record all of your business’s monthly revenue and expenses, then deduct your expenses from your income to determine your monthly net income. All monthly totals can be added together to provide an annual statement. Repeat the procedure for every additional year required.
How to Report Self-Employed Income
Once you’ve created profit and loss statements, you will also have to report your income. There are 3 main categories of income under bankruptcy cases:
- Income from running a business – Money made from any type of independent contract work.
- Employment income – Money made from working for someone else, including wages (hourly or salaried), commissions, bonuses, and tips.
- Other income – This may include alimony, Social Security, rental income, pension, royalties or dividends, disability or unemployment income, lottery, etc.
Here, we’ll focus on self-employed income—revenue from running a business. Understanding how income is reported in bankruptcy is useful to many debtors. Under bankruptcy law, income reporting requirements ensure fairness and accuracy for all parties involved.
Here are 3 different ways to report self-employment income when submitting bankruptcy forms:
- Schedule I (Your Income) – In this form, you need to include your current monthly income.
- Statement of Financial Affairs (SOFA) – When filing for bankruptcy, you also need to report all the money you earned over the course of two years and your year-to-date earnings as well.
- Bankruptcy Means Test – When you complete the means test, you will need to list the amount you’ve earned 6 months before filing.
FAQs
How much are monthly bankruptcy payments?
Monthly payments depend on the type of bankruptcy, your repayment plan, and your disposable income. Chapter 13 plans often range from a few hundred to several thousand dollars per month, depending on disposable income.
What disqualifies you from filing for bankruptcy?
You may be disqualified if you fail to meet income or debt limits, do not complete required credit counseling, have a recent bankruptcy discharge, or commit fraud.
Can I file for bankruptcy if I owe taxes?
Yes, you can file for bankruptcy if you owe taxes, but most recent tax debts are not dischargeable and must be repaid before discharge is granted.
Final Thoughts
If your case is well-prepared, the bankruptcy process should proceed smoothly. Even so, you are advised to speak to a bankruptcy attorney before filing to be sure your case will not be dismissed.
An experienced bankruptcy lawyer can help you avoid potential problems and make sure your petition is accurate. Your lawyer will ensure your documents accurately reflect your self-employed income and meet all requirements of the bankruptcy code.
