Can I file bankruptcy while self-employed?
Bankruptcy is available to self-employed persons. For the most part, the bankruptcy process is the same as it is for someone who works as an employee. However, some of the general requirements of bankruptcy have particular relevance in the self employment context.
This post is intended to address the situation where the desire is to continue the business, and to address mostly personal or consumer debts that the business owner is having difficulty paying. Such situation is typical of a small business that is profitable enough to stay in business, but not profitable enough to meet the financial needs of its owner. Considerations may be different if the business itself has financial problems, or the owners desire to wind-down the business.
Can the Business Property Be Kept?
In chapter 7, the debtor can keep a significant amount of property, but only to the extent that it is claimable under one of the allowances provided by the exemption statutes. When an individual is self-employed, he or she often have property used for his or her business, as well as typical personal property. The tools of the trade exemption is often relevant for tools and equipment, but at $2,000 in North Carolina, is relatively limited in value. Whether this protection is adequate often depends on the trade, profession, or business. To the extent they are not needed for personal items, other exemptions can be used for business property, such as the motor vehicle exemption or the wild card exemption.
The foregoing assumes that the self-employment is conducted as a sole proprietorship. If the self-employment is carried on via a business entity such as a corporation or LLC, the business property is distinct from the individual property. In this situation, the debtor cannot claim exemptions for the business property (such as the trade tools exemption), but only an exemption in the ownership interest of the company itself (e.g. the stock of a corporation). In most cases, only the wild card exemption (up to $5,000 in NC) is available for ownership interests. The value of the ownership interest takes into account both the total value of the company's assets and all of the company's liabilities.
If the property needed to maintain self-employment is too valuable to be fully protected by the North Carolina exemptions, chapter 13 bankruptcy is a possible solution. In chapter 13, instead of selling the non-exempt property, the debtor would propose paying the amount of non-exempt value to creditors over the life of the chapter 13 plan.
Can a Chapter 13 Plan Be Confirmed?
In addition to the occasion of non-exempt business property, self-employed individuals choose chapter 13 bankruptcy for the same reasons as other chapter 13 filers, including catching up mortgage payments. Confirmation of a chapter 13 plan must be obtained in each chapter 13 case, and one requirement of confirmation is to show feasibility--that the debtor can actually make the payments proposed over the course of the plan. For someone who is self-employed, the feasibility of the plan is tied to income of the debtor's business.
If a business is relatively stable, a plan based on continued income at a similar level is less likely to raise concerns of the standing trustee or the bankruptcy judge. If the business has been unstable, a debtor should be prepared to substantiate their business income projections. The timing of the bankruptcy filing may also come into play, as to provide a snapshot of the business most favorable to the debtor's position.
Self-employed individuals have a disproportionate amount of tax problems going into bankruptcy. These may or may not cause issues in a bankruptcy case, but should be discussed with a bankruptcy attorney. Transfers of property are also common amongst self-employed people. These also require careful evaluation to determine what, if any, impact they might have in a bankruptcy case.