Bankruptcy When You Are Self-Employed

How does bankruptcy actually work when you are self-employed?

You file as an individual. If you operate as a sole proprietor, there is no separate business debtor — the bankruptcy forms are explicit that a non-individual debtor means an artificial entity such as a corporation, partnership, or LLC, and that an individual debtor is a human being filing alone or with a spouse, whether or not that individual owns a business (U.S. Bankr. Ct. D. Alaska, The Forms Individuals and Married Couples Need to File Bankruptcy). So your receivables, your equipment, and your trade debts all appear on your own schedules.

The Bankruptcy Code gives self-employment its own label. Under 11 U.S.C. § 1304(a), a debtor who is self-employed and incurs trade credit in producing income from that employment is "engaged in business." That designation matters most in Chapter 13, where it carries operating rights and reporting duties. In Chapter 7, the practical difference is disclosure: the trustee wants to see what the business owns, what it is owed, and whether it is still running.

• Sole proprietorship: you and the business file together, because they are the same legal person.
• Corporation or LLC: the entity is a separate debtor and cannot receive an individual discharge or file Chapter 13 (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter).
• Your ownership interest in a separate entity is itself an asset you must list.

Can you keep running your business if you file?

It depends heavily on the chapter and on what the business actually is. Chapter 13 addresses this directly: unless the court orders otherwise, a debtor engaged in business may operate the business, and has the rights and powers of the trustee under sections 363(c) and 364, subject to any limits the court sets (11 U.S.C. § 1304(b)). In exchange, that debtor must perform the trustee's duty under section 704(a)(8) — which is to file certain financial statements about the operation of the business with the court (11 U.S.C. § 1304(c)).

Chapter 7 is a liquidation. Everything you own at filing becomes property of the estate, and the trustee may sell property to pay creditors, subject to your right to claim exemptions (Bankr. S.D. Iowa official guidance). A service business whose value is mostly your own labor often looks different in the trustee's eyes than one holding equipment, inventory, or receivables. Whether the business survives is a fact question, not a rule you can look up.

What does federal law say about the means test for self-employed filers?

The means test does not have a self-employment exemption. If your debts are primarily consumer debts, the court can dismiss a Chapter 7 case if it finds that granting relief would be an abuse of the chapter (11 U.S.C. § 707(b)(1)). Every individual filing Chapter 7 completes Official Form 122A-1, which determines current monthly income and compares it to the median income for the state; if income is above the median, Official Form 122A-2 follows, deducting living expenses and certain debt payments (U.S. Bankr. Ct. D. Ariz., Instructions for Completing the Bankruptcy Petition, Schedules and Statements).

The wrinkle for self-employment is the input, not the test. "Current monthly income" is an average, so a strong quarter and a dead quarter both count. Business expenses reduce business income before it becomes yours, which is exactly why courts want the receipts. Being above the median is not a rejection — it moves the case to the second form, and the outcome depends on the calculation.

• The comparison is to your state's published median for your household size, which lives on the state pages, not here.
• Above-median income triggers Form 122A-2; it does not by itself close the door on Chapter 7.
• Current monthly income and the § 707(b)(2) amounts must be stated after reasonable inquiry (11 U.S.C. § 527).

Where do state and local rules change the answer?

Two layers vary. State law sets most exemptions — what equity in a home, a vehicle, or tools you can protect — and those amounts belong on your state's page rather than in a national guide. Exemptions are not automatic: you must list the property on Schedule C, and if you do not, the trustee may sell it (Bankr. S.D. Iowa official guidance). For a self-employed filer, the exemption question often turns on equipment and a work vehicle, so it deserves specific attention.

The second layer is your district's local rules and forms. Minnesota, for example, requires a Chapter 13 debtor with gross income over $1,000 per month from self-employment or from a wholly owned corporation to file a statement of business income and expenses with Schedule I (D. Minn. LBR 1007-3). Arizona has a local sample exhibit for self-employed or business debtors in Chapter 7 cases. Check your own court's requirements before assuming the national forms are the whole list.

• State exemption amounts: see your state hub page.
• Local business income statements: check your district's local rules.
• Local forms may ask about employees, commercial leases, and business bank accounts.

What does this look like in practice for a contractor or freelancer?

Picture a self-employed tradesperson whose income fell after a slow winter. They have credit card debt, an unpaid business credit line, a work truck with a loan, and a few thousand dollars in unpaid invoices they may never collect. Filing puts all of it on the table at once: the truck on Schedule A/B and Schedule D, the receivables as business-related property, the trade creditors and the card issuers on Schedule E/F.

Official Form 106A/B has a dedicated part for business-related property, asking about accounts receivable or commissions already earned, and office equipment, furnishings, and supplies (U.S. Bankr. Ct. D. Alaska filing packet). Those uncollected invoices are assets even if you doubt they will ever be paid. Arizona's local exhibit for self-employed Chapter 7 debtors asks the nature of the business, whether you are still self-employed as of the petition date, whether you have employees, and where the business assets are located.

None of this decides the outcome. It sets out what the trustee will be looking at.

• Unpaid invoices are property of the estate, not a private hope.
• A truck used for work is still a vehicle with a lien and an exemption question.
• Whether the business is still operating on the petition date is a question the forms ask directly.

What documents and information will you need to gather?

Expect to document income that no employer can verify for you. The Code requires you to promptly file detailed information about creditors, assets, liabilities, income, expenses, and general financial condition, and the court may dismiss a case if you do not (Bankr. E.D. La. official guidance — Chapter 13 Form Packet). All assets and liabilities must be completely and accurately disclosed, with replacement value stated where requested after reasonable inquiry (11 U.S.C. § 527).

You will also pay filing and administrative fees. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)), a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8, effective December 1, 2023), and a $15 trustee surcharge (Bankruptcy Court Miscellaneous Fee Schedule, Item 9). A Chapter 13 case carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus the same $78 administrative fee.

• Business tax returns and, if you have one, an employer identification number separate from your Social Security number.
• Profit-and-loss records or a bookkeeping export covering the months feeding the means test.
• Business bank statements and the account numbers your district's exhibit may request.
• A list of accounts receivable and commissions already earned.
• Equipment, tools, inventory, and vehicle values, with any liens against them.
• Any commercial lease and whether payments are current.

What should you ask a bankruptcy lawyer?

Self-employment is one of the situations that courts themselves flag as harder to handle alone. The District of Maryland's pro se checklist lists "I've owned a business within the last 12 months," "I have or own an interest in a partnership, corporation or trust," and "I rent out part of my house or run a business out of a part of my house" among the items that may create legal issues difficult or impossible to resolve without a lawyer.

That is not a sales pitch from us. It is a federal court telling readers where self-representation gets risky. If you are weighing whether to hire someone, these questions get at the parts of your case that are genuinely fact-specific.

• How does my irregular income get averaged into current monthly income, and which months will be used?
• Which of my business assets are exempt in this state, and which are exposed?
• Would filing likely end my ability to keep working, or can the business keep operating?
• Do I owe any business-related taxes, and where do they fall in the priority scheme under 11 U.S.C. § 507?
• Does this district require a business income statement or a self-employment exhibit?
• If I have an LLC or corporation, what happens to the entity if I file personally?

Frequently asked questions

Does being self-employed disqualify me from Chapter 7?

No. Chapter 7 eligibility under 11 U.S.C. § 109(b) excludes railroads, certain banks and insurance companies, and similar institutions — not self-employed individuals. What self-employment changes is the documentation and, if your debts are primarily consumer debts, how your averaged income runs through the means test under 11 U.S.C. § 707(b).

Can I file Chapter 13 if my income is irregular?

Chapter 13 is described in the official notice as a voluntary repayment plan for individuals with regular income, and 11 U.S.C. § 1304 expressly contemplates self-employed debtors engaged in business. Irregular does not necessarily mean irregular in the statutory sense, but whether your income is stable enough to support a plan is a case-specific question worth raising with an attorney early.

Will the trustee take my tools and equipment?

Business equipment is property of the estate and must be listed on Schedule A/B. Whether it can be sold depends on your state's exemptions and any liens against it, and exemptions are not automatic — you must claim them on Schedule C. Official guidance warns that unlisted property may be sold with the proceeds going to creditors.

What happens to my LLC or corporation if I file personally?

Your ownership interest in the entity is an asset of your personal case and must be disclosed. The entity itself is a separate, non-individual debtor: official court guidance notes that corporations, partnerships, and LLCs do not receive discharges and are not eligible for Chapter 13. An entity considering its own filing generally needs a lawyer, because in some circuits it can only be represented by one.

Do I have to list invoices clients have not paid yet?

Yes. Official Form 106A/B has a business-property section that asks directly about accounts receivable or commissions you already earned. Concealing assets or making a false statement under penalty of perjury in connection with a bankruptcy case can result in fines, imprisonment, or both, and cases are randomly audited for accuracy.

How much does filing cost?

Chapter 7 carries a $245 filing fee, a $78 administrative fee, and a $15 trustee surcharge. Chapter 13 carries a $235 filing fee and the same $78 administrative fee. The statute permits installment payment for an individual commencing a voluntary or joint case, and the Chapter 7 waiver under § 1930(f) is conditional. Attorney fees are separate.

Do my business debts count as consumer debts for the means test?

Not automatically. The § 707(b) dismissal provision applies to an individual debtor whose debts are primarily consumer debts, and consumer debts are defined as incurred primarily for a personal, family, or household purpose. Whether your mix is primarily consumer or primarily business is a determination with real consequences, and it is worth reviewing with an attorney.

Sources

• 11 U.S.C. § 1304 — Debtor engaged in business · official source
• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 707 — Dismissal of a case or conversion to a case under chapter 11 or 13 · official source
• 11 U.S.C. § 527 — Disclosures · official source
• 11 U.S.C. § 507 — Priorities · official source
• D. Minn. LBR 1007-3 — Statement of Business Income in Chapter 13 Cases
• U.S. Bankr. Ct. D. Ariz., Form 2084-1: Exhibit E to Petition for Self employed or Business Debtors in Chapter 7 Cases
• U.S. Bankr. Ct. D. Ariz., Instructions for Completing the Bankruptcy Petition, Schedules and Statements
• 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. D. Alaska, The Forms Individuals and Married Couples Need to File Bankruptcy
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• Bankr. E.D. La. official guidance — Chapter 13 Form Packet
• Bankr. D. Md. official page — Bankruptcy Checklist
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)

Related

• Build your personalised roadmap
• The means test, explained
• Exemptions: what they protect
• Chapter 13
• Chapter 7
• Find your local bankruptcy court