Starting your own business can be an overwhelming venture. You don’t just have to worry about operations, supply, and getting your business off the ground. More dauntingly, you need to worry about your finances — which is where business owners often stumble. There are so many expenses and it seems like your business is not getting the ROI you need to keep yourself afloat.
Sometimes, the smart move for business owners is to know when it’s time to file for bankruptcy. It sounds bad, but doing so can actually do your business a favor and help you start with a clean slate. If you’re thinking about filing bankruptcy as a self-employed business owner, here’s what you need to know about it.
Requirements to File Bankruptcy for Self-Employed Individuals
Anyone who files for bankruptcy, whether under Chapter 7 or Chapter 13, will need to provide statements of their income and earning history. This is an easy feat for working individuals as they only need to show invoices or pay stubs from their employers.
These are not available for self-employed individuals, which is why they need to show other documents that can reflect their income and earning history. Some documents include:
- Bank statements
- Monthly and yearly profit and loss statements
- Payment receipts
- Tax returns
- Other documents for income disclosure.
These income disclosure documents must show a self-employed individual’s average income for 6 months prior to filing for bankruptcy. Further, there is the additional requirement of 4 years of yearly income documentation.
How to Prove Self-Employment Income
Stating your monthly and yearly income in your bankruptcy forms is one thing. But proving these in court is another. Through your complete income disclosure documents, you can prove your self-employment income. It’s straightforward if you’ve made it a point to keep good books and document your annual and monthly income.
To prove your self-employment income, you need these documents and provide a copy of them to your bankruptcy trustee:
- 3 years of personal and business bank account statements
- 3 years of business receipts such as check stubs, contracts, invoices, signed statements that document cash payments, etc.
- If you’re filing a Chapter 7 bankruptcy, 2 years of tax transcripts or federal tax returns
- If you’re filing a Chapter 13 bankruptcy, 4 years of tax transcripts or federal tax returns.
Creating Profit and Loss Statements
Profit and loss statements almost always come to play in bankruptcy cases involving self-employed debtors. After you file for bankruptcy or at your 341 meeting of creditors, your trustee will ask you for these statements.
The importance of creating profit and loss statements is to prove any inconsistencies in your petition. With these, you show your trustee that the figures match and make the process more seamless for you and your creditors.
You will need 2 years’ worth of monthly and yearly profit and loss statements. But it’s worth asking your bankruptcy lawyer or checking your area’s standard practices as some States may have different requirements.
You can create your profit and loss statements on your own or engage the help of an accountant. Here’s a simplified way of how to accomplish it:
- List all the business income received
- List all the monthly expenses incurred
- Subtract the expenses from the income
- Arrive at your monthly net income
- Add all the monthly totals
- Repeat the process for each year.
After you have compiled all your documents, such as income disclosures and profit and loss statements, you need to fill out the bankruptcy paperwork. With the required documents attached, all completed forms are then to be filed with a bankruptcy court.
The court will assign a trustee to your case, who will be in charge of verifying your financial documents and ensuring no bankruptcy fraud. You may also become subject to a means test, which will determine if your income is low enough for a debt discharge in a Chapter 7 bankruptcy.
The trustee and bankruptcy court will also compare your income and expenses and see if the difference is enough for you to make reasonable payments to your creditors. In this instance, your Chapter 7 bankruptcy case may be converted to Chapter 13 instead, where you will be bound by a payment plan to settle your debts in arrears over 3 to 5 years.
The process can get quite overwhelming, especially for the unique situations of a self-employed debtor. It will be highly beneficial for you if you have a bankruptcy lawyer helping you navigate both the procedural and substantial aspects of your case and helping you get the best results.