Filing Bankruptcy When You’re Self Employed: A Guide
Filing bankruptcy in Brooklyn, NY when you’re self-employed can feel like navigating a maze blindfolded. You’re juggling personal finances alongside the unpredictable nature of your business income. It’s stressful, but you are not alone. Many self-employed individuals face financial struggles, especially in uncertain economic times. This article will be your guide as we explore the intricacies of filing for bankruptcy when you’re self-employed and provide clarity to help you make informed decisions.
One of the first steps in considering bankruptcy, whether you’re self-employed or work for a company, is understanding the different chapters available and what might be the right option for your situation. This is where having a bankruptcy attorney in your corner can make a world of difference.
Chapter 7 vs. Chapter 13 for the Self-Employed
Before we go deeper, remember that seeking legal advice from a qualified Brooklyn, NY Bankruptcy Attorney is crucial to get personalized guidance based on your circumstances. They can help you determine which chapter is most appropriate for your needs.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often called “liquidation bankruptcy,” allows individuals and businesses to sell nonexempt assets to pay off creditors. If you’re a sole proprietor considering filing bankruptcy, you’ll need to list both your personal and business income and debts. This is because as a sole proprietor, your business is legally intertwined with your personal finances. Chapter 7 could be a viable option for you if your income falls below your state’s median income. In this case, you might qualify for a discharge of both personal and business-related debts.
A key factor to keep in mind with Chapter 7 is the potential impact on your business assets. The court-appointed bankruptcy trustee might sell off assets to repay creditors. However, each state has bankruptcy exemptions, protecting specific property. To see what exemptions might apply to you in a Chapter 7, contact The Law Office of William Waldner for help.
Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 bankruptcy, or “reorganization bankruptcy,” allows debtors to retain their assets while following a court-structured repayment plan to pay off debts within 3 to 5 years. Filing for bankruptcy under Chapter 13 may be the better option if you have a steady income stream and want to avoid losing your business assets. One significant benefit of this chapter is that it allows you to make payments while continuing your business operations.
The catch? You’ll need to demonstrate your ability to keep up with the payments, which can be difficult for those with irregular income streams.
Navigating the Means Test When Filing Bankruptcy When You’re Self-Employed
The bankruptcy means test can be tricky for those traditionally employed and even trickier when you’re self-employed. A bankruptcy court conducts this test to see if you qualify for Chapter 7 bankruptcy. This is also how they figure out which chapter works for you.
The court analyzes your average income, allowable expenses, and disposable income over a period of time, usually six months, before you file. If you’re employed by someone, proving your income is usually pretty simple: you just grab your paystubs. But how do you prove your average income for bankruptcy when it fluctuates from month to month?
Proving Your Income
If you do gig work or freelance, a good place to start is with your 1099 tax forms. Traditional employees rely on pay stubs to prove their income to the court, while self-employed people may not always get traditional paychecks, especially if they pay themselves out of business funds. That’s where accurate record-keeping is key.
When filing for bankruptcy as a self-employed individual, you need to keep track of all deposits, receipts, cash payments, and especially tax returns. The court needs these documents to clearly see your income and determine your eligibility for bankruptcy. When providing documentation, you’ll want to provide copies of your federal tax returns and any supporting documentation for business expenses.
These can be particularly difficult concepts, so taking care of these important details upfront helps you make sure you’re on track for a smoother process overall. The court may request bank statements to match up with business receipts and tax transcripts. Make sure the figures match, otherwise, the court may raise some red flags.
Here’s a table that illustrates what documentation to provide depending on how you file:
| Document Type | Chapter 7 | Chapter 13 |
|---|---|---|
| Tax Returns | 2 years | 4 years |
| Bank statements (personal & business) | 3 years | 3 years |
| Invoices & Contracts | 3 years | 3 years |
| Proof of Payment & Expense Receipts | 3 years | 3 years |
Why Bankruptcy Attorneys are Essential
It’s completely normal to feel overwhelmed during the bankruptcy process. Don’t let fear or uncertainty keep you from exploring all options. Experienced bankruptcy attorneys are well-versed in guiding self-employed folks through these complexities.
Remember that a bankruptcy attorney can advise you on the necessary steps involved with filing bankruptcy when you’re self-employed, protect your interests, and streamline the process. Attorneys are there to save you time, energy, and resources in the long run.
Conclusion
Filing bankruptcy when you’re self-employed requires careful consideration. Understanding your financial situation, researching options, and making informed decisions will give you a clearer picture of your next steps. By arming yourself with the correct information and guidance, you can make choices that pave the way to a brighter, more secure future.