Bankruptcy is often misunderstood as a last resort reserved for a certain type of debtor. If you are self-employed and your debts have become unmanageable, you may not realize that the option exists for you. It does.
Self-employed individuals are eligible to file
Federal law governs bankruptcy, and it applies uniformly in Indiana as it does everywhere else. The legal criteria for debtors delineate a narrow list of parties who cannot file: financial institutions, railroads and insurance companies. Self-employed individuals are not on that list. Freelancers, sole proprietors and independent contractors are also not excluded from filing.
The two most common options are Chapter 7 and Chapter 13, and which one makes sense depends on your situation.
Could Chapter 7 be the right move?
Chapter 7 is a liquidation bankruptcy. It allows eligible individuals to discharge qualifying debts without a repayment plan. Common dischargeable debts include medical bills, credit cards and personal loans, as well as business debts you personally assumed.
To file for Chapter 7, you need to pass the means test. It compares your income to Indiana’s median income for your household size. For self-employed filers, that income figure is not your total revenue. You subtract your legitimate business expenses first. The lower that number, the better your chances of qualifying.
The tradeoff is that Chapter 7 does not keep a business running. If staying open matters to you, Chapter 13 may be worth considering.
Could Chapter 13 help you keep working?
Chapter 13 bankruptcy provides a structured path to repay outstanding obligations over three to five years without surrendering your assets, including your business. Creditors cannot pursue you while the plan is active. Whatever eligible debt remains at the end of the repayment period gets discharged.
The requirement is that your income be consistent enough to sustain the payments. For self-employed filers with irregular earnings, that can be a real consideration.
What to expect as a self-employed filer
The financial profile of a self-employed individual is more intricate than a standard filing. The distinction between personal and business finances is rarely clear-cut, and income fluctuates in ways that complicate the calculations. Deductible business expenses and outstanding financial obligations all require precise documentation to get right.
Neither chapter is better than the other. The appropriate path depends on your income, your liabilities and what you want your situation to look like on the other side.
