Chapter 13 When You Are Self-Employed

How does Chapter 13 actually work when you are self-employed?

Chapter 13 is a court-supervised repayment plan for an individual with regular income. Federal law adds a specific category for people in your position: a debtor who is self-employed and incurs trade credit in the production of income from that employment is "engaged in business" (11 U.S.C. § 1304(a)). Trade credit means credit extended to you in the ordinary course of the business, such as a supplier who invoices you rather than requiring payment up front.

Being engaged in business does not push you out of Chapter 13. It changes what you may do and what you must report. Unless the court orders otherwise, a debtor engaged in business may operate the business, and holds the rights and powers of the trustee under sections 363(c) and 364, exclusive of the trustee (11 U.S.C. § 1304(b)). One district court's guidance puts it plainly: a person who operates a small business as a sole proprietor may file under Chapter 13, though a corporation or partnership may not.

• Self-employment alone does not make you "engaged in business" — the statute ties the label to incurring trade credit.
• A sole proprietorship files with you, as you; a corporation, partnership, or LLC cannot be a Chapter 13 debtor.
• The business generally keeps running during the case rather than being shut down or sold off by a trustee.

What changes the answer for a freelancer or gig worker?

Several facts move the analysis, and none of them is about how you feel about your income. First, the legal form of the business: only an individual may be a Chapter 13 debtor, so an LLC or corporation you own is treated as an asset, not a co-filer. Second, whether you incur trade credit, which determines whether the "engaged in business" provisions and their reporting duties apply at all.

Third, whether your income is regular enough to fund a plan. Chapter 13 requires an individual with regular income, and the court must find that you will be able to make all payments under the plan and comply with it (11 U.S.C. § 1325(a)(6)). Irregular does not automatically mean insufficient; seasonal or variable earnings can still be regular in the sense the statute uses. Fourth, the debt limits under 11 U.S.C. § 109(e), which are adjusted periodically and have changed by statute more than once.

What does federal law say about a self-employed Chapter 13 debtor?

Four provisions carry most of the weight. Section 1304(a) defines the self-employed debtor who incurs trade credit as engaged in business. Section 1304(b) lets that debtor operate the business, exclusive of the trustee, subject to the limits on a trustee under sections 363(c) and 364 and to any conditions the court prescribes. Section 1304(c) requires the debtor engaged in business to perform the trustee duty specified in section 704(a)(8) — the financial reporting duty for an operating business.

The trustee's side of the case also expands. If the debtor is engaged in business, the trustee performs the duties specified in sections 1106(a)(3) and 1106(a)(4) in addition to the ordinary Chapter 13 duties (11 U.S.C. § 1302(c)). Those are investigative and reporting functions. In practical terms, someone is looking at the business, not just at your household budget.

Separately, your plan must submit enough of your future earnings or other future income to the trustee's supervision and control to execute the plan (11 U.S.C. § 1322(a)(1)).

• § 1304(a) — who counts as engaged in business
• § 1304(b) — your right to keep operating, subject to court limits
• § 1304(c) — your financial reporting duty
• § 1302(c) — the trustee's added investigative duties in a business case

Where do state and local rules make a difference?

Two places, mostly. Exemptions — what property you can protect — are governed by 11 U.S.C. § 522, which permits a debtor the exemptions available under other federal law and the law of the state of their domicile, and lets states decide whether the federal exemption list is available as an alternative. For a self-employed filer this often matters more than for a wage earner, because tools of the trade, a work vehicle, and business equipment are all property you need in order to keep earning. Those amounts live on our state pages, not here.

The second place is local court practice. Districts set their own filing requirements and forms. One district's local rule requires a Chapter 13 debtor with gross income above a set monthly amount from self-employment, or from a corporation the debtor solely owns, to file a statement of business income and expenses along with Schedule I (D. Minn. LBR 1007-3). Another district mandates its own court-approved Chapter 13 plan form and service procedure (C.D. Cal. LBR 3015-1). Check your own district before assuming a national default.

• Exemption law is state-driven — see your state page rather than a national figure.
• Local rules can add business-income schedules that a wage earner never files.
• Some districts mandate a specific plan form and service timeline.

What does this look like in practice for someone with 1099 income?

Start with the fee. The Chapter 13 filing fee is $235 (28 U.S.C. § 1930(a)(1)(B)), plus a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8, effective December 1, 2023). The statute permits an individual commencing a voluntary or joint case to pay the filing fee in installments, and district guidance describes an application to do exactly that.

After filing, payments start quickly. Unless the court orders otherwise, you must commence making payments not later than 30 days after the date of filing the plan or the order for relief, whichever is earlier (11 U.S.C. § 1326(a)(1)). That first payment is due before confirmation, and the trustee holds it until the plan is confirmed or denied. If the plan is not confirmed, the trustee returns payments not yet due and owing to creditors, after deducting any allowed administrative claim (11 U.S.C. § 1326(a)(2)).

Meanwhile, the business generally keeps operating and you keep the reporting obligation running alongside it.

What documents and income proof will you need?

A wage earner hands over pay stubs. You generally cannot, so the proof shifts to your own books and your tax filings. District checklists ask for proof of all income for the past six months and copies of any payment advices received from an employer within 60 days before filing, along with bank statements for the past six months, including accounts closed within the last year.

The standard schedules still apply. Schedule I asks you to describe employment and explicitly directs you to include part-time, seasonal, or self-employed work. One district's local rule requires a separate statement of business income and expenses filed with Schedule I when self-employment gross income exceeds the threshold in that rule. The Statement of Financial Affairs asks about businesses you have operated, including the nature of the business, an EIN, and any financial statement you gave to a creditor within two years before filing.

Confirmation also requires that you have filed all applicable federal, state, and local tax returns as required by section 1308 (11 U.S.C. § 1325(a)(9)).

• Six months of income records and six months of bank statements, including recently closed accounts
• A profit-and-loss picture of the business — income and expenses, not just deposits
• Filed tax returns, which are a confirmation requirement, not a formality
• Schedule I with self-employment income disclosed, plus any local business-income statement
• Certificate of credit counseling from an approved agency, obtained within 180 days before filing

What should you ask a bankruptcy lawyer?

Bring the business into the first conversation rather than treating it as a detail. Useful questions are specific and local, because the operating and reporting rules are where self-employed cases most often go wrong.

Ask whether the trade credit you carry makes you "engaged in business" under § 1304(a), and what reporting that triggers in your district. Ask what your particular court expects as income proof when there are no pay stubs, and whether a local statement of business income and expenses is required. Ask how a variable month affects a fixed plan payment, and what happens in a bad quarter. Court guidance notes that debtors in business cases may be concerned that unpredictable changes in the economy could depress earnings and make a fixed payment difficult, and that plan structures other than a flat monthly amount have been proposed in some cases.

Ask, too, whether the business assets you need in order to keep earning can be exempted under your state's law.

• "Does my trade credit make me engaged in business, and what reports would I owe?"
• "What does this district accept as income proof for 1099 or platform income?"
• "How would a slow month be handled once a plan is confirmed?"
• "Which business assets can be exempted under this state's law?"
• "Are my tax returns current enough for confirmation under § 1325(a)(9)?"

Is Chapter 13 or something else the better fit for a small business owner?

Chapter 13 is not the only reorganization chapter, and the comparison is worth making early rather than after filing. Court guidance describes Chapter 13 as available only for an individual with regular income whose noncontingent, liquidated debts do not exceed the specified debt limits under § 109(e), and notes that in general a Chapter 13 case is likely to be simpler and cheaper than the alternatives.

Where debts run past those limits, or the business is held in an entity that cannot itself be a Chapter 13 debtor, other chapters come into view. Chapter 11, including its Subchapter V small-business track, exists for that situation, and one district's pamphlet notes that some individuals may need Chapter 11 because their debts are too large to file Chapter 13. Those cases are meaningfully more complex.

Chapter 7 is a different trade-off entirely: liquidation rather than repayment, with its own income screening under § 707(b). We compare the two consumer chapters in more detail on the Chapter 7 and Chapter 13 pages.

Frequently asked questions

Can I file Chapter 13 if I have no W-2 and only 1099 income?

Yes. Chapter 13 is open to an individual with regular income, and district guidance states that a person who operates a small business as a sole proprietor may file under this chapter. The form of income is not the test; the ability to fund a plan is. Section 1325(a)(6) requires the court to find that you will be able to make all payments under the plan and comply with it.

Does filing Chapter 13 shut down my business?

Generally no. Unless the court orders otherwise, a debtor engaged in business may operate the business and holds the trustee's rights and powers under sections 363(c) and 364, exclusive of the trustee (11 U.S.C. § 1304(b)). Those powers are subject to any limitations or conditions the court prescribes, so a court can impose conditions on how the business operates during the case.

What extra reporting do I have as a self-employed Chapter 13 debtor?

A debtor engaged in business must perform the trustee duty specified in section 704(a)(8) — the financial reporting duty for an operating business (11 U.S.C. § 1304(c)). Separately, the trustee in a business case performs the added duties in sections 1106(a)(3) and 1106(a)(4). Some districts also require a statement of business income and expenses filed with Schedule I.

Can my LLC or corporation file Chapter 13 with me?

No. District guidance is explicit that a corporation or partnership may not be a Chapter 13 debtor, and one court's pamphlet notes that corporations, partnerships and LLCs are not eligible for Chapter 13 and can be represented in court only by a lawyer. You would file as an individual, with your interest in the entity treated as your property.

How much does it cost to file Chapter 13?

The Chapter 13 filing fee is $235 (28 U.S.C. § 1930(a)(1)(B)), plus a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8). The statute permits an individual commencing a voluntary or joint case to pay the filing fee in installments, and courts provide an application form for that. Attorney fees are separate and vary.

When do plan payments start if my income is irregular?

Unless the court orders otherwise, payments commence not later than 30 days after the date of filing the plan or the order for relief, whichever is earlier (11 U.S.C. § 1326(a)(1)). The timing does not flex for irregular income. The court may, upon notice and a hearing, modify, increase, or reduce the payments required pending confirmation (11 U.S.C. § 1326(a)(3)).

Do I need my tax returns filed before I can confirm a plan?

Yes. Confirmation requires that the debtor has filed all applicable federal, state, and local tax returns as required by section 1308 (11 U.S.C. § 1325(a)(9)). For self-employed filers with unfiled returns, this is often the first thing to fix, because it also produces the income records the trustee will ask for.

What if my earnings swing a lot from month to month?

Chapter 13 plans typically provide for a regular fixed amount, and court guidance acknowledges that debtors in business cases may worry that unpredictable changes could depress earnings and make a fixed payment difficult. That guidance discusses plans proposing payment of actual disposable income rather than a fixed sum. Whether that fits your case is a question for a lawyer in your district.

Sources

• 11 U.S.C. § 1304 — Debtor engaged in business · official source
• 11 U.S.C. § 1302 — Trustee · official source
• 11 U.S.C. § 1322 — Contents of plan · official source
• 11 U.S.C. § 1325 — Confirmation of plan · official source
• 11 U.S.C. § 1326 — Payments · official source
• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 707 — Dismissal of a case or conversion to a case under chapter 11 or 13 · official source
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• D. Minn. LBR 1007-3 — Statement of Business Income in Chapter 13 Cases
• C.D. Cal. LBR 3015-1 — Procedures Regarding Chapter 13 Cases
• Bankr. W.D. Ky. official guidance — Chapter 13 Filing Requirements
• Bankr. N.D. Ill. official page — eSR Chapter 13 Checklist
• Bankr. N.D. Ill. official guidance — Required Documents Chapter 13
• COB official page — Chapter 13 Voluntary Petition Packet
• Bankr. E.D. La. official guidance — Chapter 13 Form Packet
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• U.S. Bankr. Ct. S.D. Ala., SBRA guide (Judge Paul Bonapfel, 338 pp.) (updated June 2022)
• Bankr. D. Md. official guidance — A Guide to the SBRA of 2019 - Rev. June 2022 (Hon. Paul W. Bonapfel, N.D.Ga.)

Related

• Chapter 13
• Chapter 7
• Exemptions: what they protect
• Find your local bankruptcy court
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