Running your own business offers flexibility and independence, but it can also bring financial instability, especially during recessions or unexpected hardships. If you’re struggling with debt, you may be wondering whether bankruptcy is even an option for someone who is self-employed. Understanding your legal rights and options is crucial to protect your financial future, so continue reading and contact an experienced Montgomery County bankruptcy lawyer today.
Can I File for Bankruptcy if I’m Self-Employed?
Yes, you can file for bankruptcy even if you have your own business. Being self-employed does not disqualify you from seeking debt relief through the bankruptcy process. In the eyes of the law, self-employed individuals are generally treated the same as W-2 employees when it comes to eligibility for personal bankruptcy.
Your business structure and how your business income and debt are categorized will play a significant role in determining how the bankruptcy process proceeds. For sole proprietorships, the individual and the business are treated as one legal entity, meaning your personal filing will encompass your business debts and assets.
If your business is a corporation or LLC, it is typically viewed as a separate legal entity, and a personal bankruptcy filing would primarily address your personal debts and personal liability for business debts you guaranteed.
What Bankruptcy Chapter Is Best for Self-Employed Individuals?
The most optimal bankruptcy chapter for a self-employed individual depends on their specific financial situation, business structure, and goals.
Chapter 7, known as liquidation bankruptcy, is often best if you are a sole proprietor with limited business assets or if your business is struggling and you intend to close it. It provides a quick path to discharging unsecured debts, but any non-exempt business assets may be sold by the trustee. You must pass the means test, which considers your household income, even if much of it comes from your business.
Chapter 13, or reorganization bankruptcy, is generally preferable for sole proprietors who want to keep operating their business while catching up on debts. It allows you to use future business income to fund a repayment plan, typically over three to five years. It also provides a way to repay secured business debts, like equipment loans, over time.
For businesses structured as LLCs or corporations, the business itself might file Chapter 11, including the Subchapter V, to reorganize, while the owner files a separate Chapter 7 or 13 for personal debts. Consult a Montgomery County bankruptcy lawyer for help navigating this process.
Will I Lose My Business If I File for Bankruptcy?
Under Chapter 13, sole proprietors can usually continue operating while restructuring debts. If filing Chapter 7, the risk depends on whether business assets are exempt. Non-exempt assets might be liquidated. For LLCs or corporations, a personal bankruptcy filing does not automatically affect the business entity. Working with a skilled bankruptcy lawyer is essential to protect your business during the process.
