If you are self employed and filing bankruptcy, then you should know that it is possible, but you may have some additional hurdles you will need to go through to document your income and assets. The same is true when you file your taxes or apply for a home loan as the government or the lender wants to know what your actual income is and whether your income will be the same or consistent for the years to come based on historical averages.
With that said, for bankruptcy purposes we would mainly be concerned about your income from the six months prior to filing your bankruptcy case. So, although you may have been wildly successful in prior years, the prior six months is going to be what matters the most. I discussed filing for bankruptcy while being self employed on 1150AM KKNW and you can listen to that discussion here:
What Documentation do I need to Provide if I am Self Employed and Filing Bankruptcy?
Everybody who wants to file for bankruptcy with the help of an attorney, will likely need to complete a bankruptcy questionnaire, provide your last 2 years of tax returns and well as your last 6 months of income.
For self-employed bankruptcy filers, providing proof of income can consist of a profit and loss statement for the 6 months prior to filing. If you are not used to keeping a profit and loss for your business you can enlist the help of an accountant or try to create something on your own that shows your income and expenses for the 6 months prior to filing.
If you are a 1099 worker such as drive for Uber/Lyft or Amazon, then you may be able to get away with providing your paystubs or provide your pay history to your bankruptcy attorney for the prior 6 months to filing, although if want to include expenses from operating what is considered a self employed business, a profit and loss statement would make sense, although it may not make a difference if you are a below median income debtor.
Self Employed Bankruptcy & The Means Test
The means test is something the federal government came up with to determine how much disposable income a person household has to pay their creditors for bankruptcy purposes. If you are a below median income debtor for your household size and Washington State, then you do not have to “pass” the means test. Passing the means test occurs when somebody makes above the median income for their household size but because of other necessary expenses, they don’t make enough to pay anything to creditors. This can make the difference in somebody having to file chapter 13 bankruptcy and go on a repayment plan, versus somebody filing a chapter 7 bankruptcy and wiping out all of their debt without a payment plan.
Right now, in 2021, Washington State, a household of 1 can make $70,194 and the number goes higher based on how many people are living in the home. So, if you are a household of 1 and make less than $70,194 you don’t have to pass the means test, however with self employed income, that number may be calculated differently than somebody with a regular W2 job.
The Means Test for the Self Employed
When a self employed person is calculating whether they are below or above the Washington State median income, they can take their gross income and subtract their business expenses to then determine based on that number whether they are below the median income. For bankruptcy purposes, the last six months of income are calculated and then that number is multiplied by 2 and we don’t use income from the month you are currently in when filing your bankruptcy.
Can a Self-Employed Person Include Business and Personal Debts in Bankruptcy?
Any debtor who files for bankruptcy must include all debts they have at the time of the bankruptcy filing. The means that if you personally guaranteed a business debt or are a sole proprietor these debts would be included in your bankruptcy case.
It should be noted that if you are not filing a bankruptcy for your business, then the business will remain liable for that debt, so it may make sense to close the business prior to filing for bankruptcy or the business could file it’s own bankruptcy, but a business cannot receive a discharge of it’s debts so it may not make sense to do so unless the business owed certain taxes which may not pass onto you personally if the business files for bankruptcy.
Can I Keep Running a Self-Employed Business after Filing Personal Bankruptcy?
Many people who file a personal bankruptcy, do want to continue to run a self-employed business which may be ok post-bankruptcy filing. This is likely because the business has no value and therefore is no at risk of being taken and sold by a bankruptcy trustee. The story may be different if your business has actual value, then you would want to talk to your bankruptcy attorney to determine what your risks are.
On the other hand, it may not make sense to continue to operate a business, if the business was also liable for debts incurred and may be easier to close the current business and open a new business at a later date.