What Type of Bankruptcy Should a Self-Employed Person File?

Filing for bankruptcy can be difficult for the self-employed.  Depending on how your business is structured, you may not be able to take advantage of Chapter 7's swift course of action.  The following is a breakdown of what kinds of bankruptcy might be best for different kinds of self-employed debtors

Sole Proprietors

If you are a sole proprietor, you are your business.  Most likely, you are personally liable for all of your business's debts.  You put the money from the business directly into your own personal bank account and just report the income right on your 1040.  You never formed a company and just went straight to work.

Unfortunately, sole proprietors may have a hard time with a Chapter 7 case.  The reason for this is that there is no separation between the business and the individual debtor.  Therefore all the assets of the business are the personal assets of the debtor.  Your business assets would then be part of the bankruptcy estate and, if the value of those assets exceeds the allowable exemptions, the Trustee could take them and sell them for the benefit of your creditors.  You most likely would have to shut down the business and start all over if you chose a Chapter 7.

There is an alternative, however.  If your business is still generating income, though not enough to pay off the creditors entirely, you could possibly file under Chapter 13.  The estate, in a Chapter 13 is the future earnings of the debtor.  You get to retain your property, use it, sell it, do with it what you will, so long as the creditors get what they would have gotten in a Chapter 7.  More importantly, you would get to keep your business running in order to generate the income to fund your Chapter 13 plan.

LLCs, Corporations, and other Incorporated Entities

If you have an LLC, S-Corporation, LLP or other incorporated entity, you can still file a Chapter 7 case.  The possibility of keeping your business would depend on whether the assets of the business are outweighed by the debts of the business. 

If you own or partly own an incorporated entity, your bankruptcy estate includes only the value of your interest in the business.  The business has an existence of its own outside of you by virtue of the incorporation.  The assets of the business belong to the business, not you.  Therefore, they are not part of the estate.

If your business does not have a lot of assets, and you are sufficiently in debt that you cannot pay your bills, a Chapter 7 might be right for you.