Bankruptcy For People Who Are Self Employed
Determining income for people who get a regular paycheck is usually very easy. Pay stubs or bank statements clearly show what the debtor earned. But self-employed filers face some complexities, both in proving income, and protecting the value of their business.
The Means Test and Income
People filing for Chapter 7 bankruptcy have to show that they pass what is known as the means test. The means test sets a maximum amount that someone can earn in order to be allowed to file for bankruptcy. If you earn less than the median amount in your state, you can file, and if you earn more, you will have to itemize certain deductions to see if you can file for Chapter 7.
But what does someone who is self employed actually make or earn? Often, showing this can be difficult, especially for smaller businesses where income, losses, profits and expenses can be commingled between business and personal or be irregular and sporadic.
To document income to a bankruptcy trustee, you will have to prove a profit loss statement if you are self-employed. Remember that although a lot of profit may be good for your business for a multitude of reasons, when it comes to bankruptcy, the court will often consider profit to be the amount that you made or took home in salary. If this isn’t the case, you need to work with your accountant to more accurately classify expenses and earnings on your statement.
You will also have to provide bank records not just for yourself (which you would have to do whether or not you own a business), but you will have to prove records for the business. This can include check stubs, bank statements, or copies of checks.
Many people who are self-employed don’t pay themselves the same thing all the time. They may make a large payout this month, a small one next month, a small distribution 2 weeks later, etc. In bankruptcy, your income is determined by the average that you made 6 months before filing. That means that if you can help it, you should try not to make large distributions that aren’t representative of your normal income, before the bankruptcy.
You want your previous 6 months’ average to be as close as possible to a realistic picture of what you normally earn, and not skewed upwards or downwards by any one-time events.
Exempting Your Business
The value of your business will be an issue as well. Like any other asset, your business is also an asset, and if it is valued too high, it could be lost. However, if it does have a significant value, you may be able to file a Chapter 13 bankruptcy, and keep the business.