What You Should Know About Bankruptcy if You’re Self-Employed

Sometimes circumstances can make bankruptcy the only option if you’re struggling with large amounts of debt. You could have an unforeseen medical condition that ended up costing you a fortune you didn’t have. If you own some type of property, someone could have become injured and won a lawsuit against you which you can’t afford to pay.

Whether you file for chapter 7 or chapter 13, the one thing that is universal is that you will have to prove your income. For people who work as an employee and get a W-2 that is not too hard. However, for independent contractors or the self-employed, proving your income may be a little trickier.

What Do I Need to Do?

Chapter 7 and chapter 13 both require that you prove your income. Since chapter 7 lets you discharge all of your debts, the court must be able to determine that you simply cannot afford to pay off your debts. With chapter 13, since you will be paying off some of your debt, the courts have to know what you can afford to pay. Having an accurate and verifiable account of your assets and income is crucial to getting a judgment you can afford to pay.

How Do I Verify My Income?

If you are an independent contractor, the company, person, or persons who contract with you should send you a 1099 form at the end of the year. Of course, you have to provide information on any assets you have like a condo, house, car, etc. The value of your assets will be instrumental in determining your worth. If you do not get a 1099 form it does not mean the money you make is tax-free. You are responsible for paying the employee and the employer’s taxes on any money you make as an independent contractor.

The 1099 forms will verify your income derived from those who provide them. For those who don’t, you can use a spreadsheet downloaded from PayPal if that is how you are paid, direct deposit information from your bank if that is how you are paid, or bank deposits if that is how you are paid. Fortunately, the banks are only interested in the income you received in the six months prior to your filing. Unless you get a 1099 within that time period you will have to use one of the other methods to verify your income.

If you are self-employed and own a business, it is a different situation. You will have to prove your income and expenses. If you use a free or paid computer program to track your inventory, sales, income, or expenses, this will help you to organize yourself with the court and your attorney, but it is not proof of your income or expenses. You need documents to back up what you have recorded in your online programs.

You should be sure that you have bank statements that show deposits of cash and checks, receipts for anything cash-related, copies of checks easily obtained from your bank, contracts, invoices, PayPal or other cash app records, and texts or emails indicating amounts you have paid or been paid. The more documents you have, the better off you will be and the smoother the process will go.

Our Northeast Ohio Bankruptcy Attorneys can help you with a Free Bankruptcy Consultation which can assist you in deciding whether chapter 7 or chapter 13 Bankruptcy is more appropriate for your situation. They will also advise you on which documents are needed to establish income and expenses once your case begins.