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Can self-employed people file bankruptcy?

Filing bankruptcy requires more documentation from self-employed people

The line between business owner and consumer is blurred when people who are self-employed, and that often leads to complications when they file bankruptcy.

When running a business, the solo owner is often considered in the same league as an individual consumer when it comes to purchasing materials or banking. For someone considering filing under Chapter 7, in which all non-exempt assets must be sold to pay off creditors, there may be confusion regarding personal assets and business-related property.

Some assets necessary to running a business, such as tools of the trade or a vehicle, may not be exempt for their full worth. That would give the trustee assigned to the case by the U.S. Bankruptcy Court the ability to seize the assets and sell them. Under these circumstances, continuing self-employment would be very difficult.

Unlike employed individuals, who can show proof of income with pay stubs, the self-employed person must compile bank statements and profit and loss documents for the six months prior to filing bankruptcy. They must also be clear about money that has been designated as "salary" and funds that went back into the business.

Other defining factors

Proof of income is just one of the areas in which employed individuals have an easier time of documenting their financial status for both Chapter 7 and Chapter 13.

In a Chapter 13 case, which requires monthly payments to creditors for three to five years, the debtor must determine whether the amount of the installments outweighs the value of continuing self-employment and the assets that are necessary to keep it going.

Because of the value of the business, self-employed people may also be "above median" debtors whose monthly income is technically above the income for households of a similar size in their state.

However, a second part to the means test that is required to determine bankruptcy eligibility may be a benefit to the self-employed. That part focuses on how much disposable income is left after accounting for their usual household expenses and the costs of running a business. If they don't have disposable monthly income, self-employed debtors may qualify for Chapter 7 after all.

"You [can] move to round two to see if you can qualify for Chapter 7 under a more detailed budget evaluation, the purpose of which is to determine whether you have any disposable income," writes Atlanta bankruptcy attorney Jonathan Ginsberg on Bankruptcy Law Network.

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