Can I File for Bankruptcy If I Am Unemployed?
February 27, 2024
In today's gig economy, self-employment, freelancing, and contract work are increasingly common ways of generating income. If you are self-employed and experiencing unmanageable debt, you may be unsure of your debt relief options. Whether you are self-employed as a gig worker, sole proprietor, or independent contractor, you will qualify for personal bankruptcy with either Chapter 7 or Chapter 13—even if your debts are associated with your business. If you operate under a separate business entity like a corporation or an LLC, you will also have the choice to place your business into bankruptcy. Here, we will go over your options for bankruptcy while being self-employed.
What is considered "Business Income"?
Even if you do not consider yourself a business owner, some of your income may still qualify as business income under bankruptcy law. There are three categories of income:
1. Employment Income
This money is earned by working as someone's employee and includes wages, tips, bonuses, and commissions. If you receive a regular paycheck, taxes are withheld on your payment, and you receive a yearly W-2 for your taxes, you are likely classified as an employee with employment income.
2. Business Income
This is any money that you earn through working. If you do gig work, freelance, or receive a 1099 tax form, you are likely considered an independent contractor. All money gained from this work is considered business income.
3. Other income
This includes all other sources of income that are not generated through work, such as Social Security, alimony or child support, pension or retirement income, disability income, lottery or gambling winnings, etc.
During bankruptcy, you must disclose all income you've earned from any of the above sources, even if it is not your primary income source.
What is your business structure?
If you have business income, you must disclose how your business is structured. This can help determine which kind of bankruptcy you can file. For instance, if your business income is earned under a corporation, LLC, LLP, PA, or PC, it is deemed a distinct legal entity from you as an individual. These business entities can file their own bankruptcy, separate from the individual tied to the business.
If your business is not structured as an entity, you are considered a sole proprietor.
How does business structure affect bankruptcy?
Because sole proprietors are legally considered personally responsible for any debts incurred under the business's name, they will file bankruptcy as individuals. This means that the bankruptcy case must include all business assets and debts as well as all personal assets and debts. A sole proprietorship cannot file business bankruptcy. If you are a sole proprietor with little business assets or debts, your side hustle is not likely to have much of an impact on your bankruptcy. However, if your side business does have a lot of assets and debts, it can make things complicated when determining exemptions. An experienced bankruptcy attorney can advise on your exemption options.
If your business is officially registered as a separate legal entity, then you can file a business bankruptcy. This kind of bankruptcy will only consider the assets and debts associated with the business entity, not your personal assets or debts. Conversely, you can file personal bankruptcy without your business being included.
Regardless of your self-employed status, you have bankruptcy options available. However, determining how to file for bankruptcy when you are self-employed can be complex. Veitengruber Law can help you find the best path forward for you and your business.