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Can the Self Employed Claim Bankruptcy?

Self employed bankruptcy cases work in both Chapter 7 and Chapter 13. Depending on your circumstances, continued business operations are possible. You do NOT always have to close your business if you file bankruptcy. In fact, self employed bankruptcy often keeps businesses from failing. Don’t think you need to file a Chapter 11 or Chapter 5. Most self employed bankruptcy cases are Chapter 7 or 13.

If your self employed business employs only you, and you have no inventory or accounts receivable, you may be a good candidate for a chapter 7. If your business has employees, you have ongoing contracts, or inventory you buy and sell, a chapter 13 might work better. Either way, bankruptcy may save your business from going under.

Self Employed Bankruptcy

Chapter 7 for Self Employed

Chapter 7 cases for businesses may not need to perform a means test. The means test contains the requirement that consumer debt constitutes the majority of the debt. If business debt, not consumer debt, makes up the majority of your debt, no means test needed.

Self employment status does not affect eligibility for Chapter 7. Corporations, however, don’t get a discharge in bankruptcy. In my experience, filing self employed bankruptcy cases for over 30 years, most

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Filing Chapter 13 While Self Employed.

You can continue self employed business during a Chapter 13. The Chapter 13 trustee requires that “business cases” file quarterly reports. The trustee will monitor business operations so that the business is successful. With debts under control, many businesses continue to run profitably.

If your business needs cash to operate, this could be a problem. Normally, in Chapter 13, we don’t see businesses borrowing money to operate. The problem here is obvious. Going into debt while trying to get out of debt is tricky. It’s not impossible, but as a practical matter, it is seldom done.

Most Self Employed Bankruptcy Has Personal Debt Guarantees

Self employed businessmen typically sign personal guarantees on debt. Seldom do we see debt or credit in the name of the business alone. As a result, you will ordinarily file a bankruptcy, when self employed, as a personal bankruptcy. You don’t file the bankruptcy on the business. Rather, you file a personal bankruptcy, with the business being listed as an asset you own. In fact, you must assign a value to the business itself. This is seldom a problem, however, since most self employed businesses have no value aside from the owner’s contribution and skill.

Downside to Self Employed Bankruptcy

Getting rid of the debt often means your business will survive. One downside, however, arises if you need credit to operate. For example, self-employed contractors often need to purchase materials. They purchase what they need on credit, and are paid back later. Immediately after a bankruptcy, there often is no credit available (you need some time to build it back up after bankruptcy). When this happens, contractors often change, for a time, their business model to require the customer to purchase materials in advance. I help self employed businessmen file bankruptcy regularly. Their complex business factors require more expertise than consumer cases. Get a certified specialist to help you keep your business from failure. Your income depends on it.

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Useful Calculators

Here are two helpful calculators for managing your debt repayments and Chapter 13 commitments.