Small business owners in and around New York City don’t have to be told that a single bad quarter is enough to put a small enterprise out of business. When cash flow is more like a trickle or a desert and capital dries up, bills and vendors pile up. If you’re self-employed and have been thinking of filing for bankruptcy, you may be wondering how this will affect you and your business. At Delancey Street, a business debt settlement company in New York City, we negotiate with funders and lenders on behalf of owners like you, but we also know bankruptcy is sometimes the better path. Here are six things to know before you file.
The first is that most self-employed people are still eligible to file, under Chapter 7 or Chapter 13. However, there are some specific challenges that most people who work for themselves must overcome when filing for bankruptcy. The biggest one is that your personal and business money tends to run together. The more clearly you can separate the two, the easier the process will be. When you file, you will likely need to provide more documentation of your business income and expenses.
Second, you will have to prove your income a different way. For someone who gets a regular paycheck with taxes withheld, that information is all on the pay stub. As a self-employed individual, you may not have paystubs to show to the bankruptcy court as proof of your income. There are other ways to prove your income though, such as your tax returns, your bank statements and receipts for items you’ve sold. Try to have these records together at least six months before you file. For most freelancers, self-employed folks and small business owners, a lot of time goes into gathering records.
Third, the profit and loss statement carries a lot of weight. Most small business owners are familiar with a profit and loss statement. This is how you prove to the court your income and expenses for the period of time in question. It’s important to provide a very detailed Profit and Loss statement to the court. This should show all of your business expenses and income. Precise reporting gives the court or trustee an honest picture of your disposable income, a crucial factor in whether you are eligible for Chapter 7 or Chapter 13. If you don’t already have a P&L statement, now is the time to create one.
Fourth, your disposable income plays a big part in whether you qualify for Chapter 7. Chapter 7 of the Bankruptcy code is referred to as the “liquidation” bankruptcy. Non-exempt assets are sold to pay off as much debt as possible, and most of the remaining debts are then discharged. To qualify for Chapter 7 bankruptcy, you must pass the “means test.” It compares your “current monthly income” to the median income for your state. If you fall below that benchmark, you automatically meet one of the criteria. Calculating the income of a regular employee is easy. For a self-employed worker who does not know how much money will come in on any given day, it can be harder. If you earn more, there may still be hope. A Chapter 7 case might still be a good fit for you if your business deductions are large enough.
Fifth, Chapter 13 is more difficult for the self-employed. Often called reorganization bankruptcy, it has you repay some or all of your debt through an approved plan, which usually lasts between three and five years. The debtor must have a reliable income source in order to make regular installment payments to the bankruptcy trustee. What happens if you don’t know what you’re going to earn from month to month? The more fluctuations there are in your income, the harder it is.
Sixth, the court and the trustee will review your income disclosures closely, looking for discrepancies, things that don’t make sense, errors, and outright lies. The court wants you to be completely transparent when reporting your income and expenses. Inaccuracies anywhere in the forms can lead to dismissal of your case or even legal penalties. Just because you are a small business owner does not mean you are a dishonest person, but misreporting can raise suspicions of fraud. So make sure your income disclosures are clear and accurate, and make sure you have records of everything you’re including on those disclosures.
Knowledgeable Bankruptcy Attorney
All of this can become difficult and it’s recommended that you hire a knowledgeable bankruptcy attorney. An experienced bankruptcy attorney can help you properly complete and submit all the correct forms. A skilled attorney is your advocate through this process. They represent you with creditors and in court, including in disputes over asset valuation or whether a debt can be discharged. Your attorney will guide you through the process and explain the options.
The decision to file for bankruptcy is rarely an easy one. Self-employed and small business owners in particular face their own special challenges. If you are in that spot, you may be feeling confused, overwhelmed, and even ashamed of your situation. You don’t have to go through this alone. Settling business debt is an alternative to bankruptcy. Debt settlement is a negotiation between you and your business creditors (lenders, vendors, and funders) to resolve your debts for less than the full balance owed, and that is the work we do at Delancey Street. It all depends on what’s right for you and your business. We are not a law firm, and when bankruptcy, such as Subchapter V, is the better path, we refer owners to a vetted independent bankruptcy attorney. If you’re weighing up bankruptcy vs debt settlement, or if you have questions about the process, let us help. Your first consultation with us is free and confidential.
