The ongoing COVID-19 pandemic has wreaked havoc on the economy, and many self-employed Americans are struggling to deal with mounting debts and operating costs. Declaring bankruptcy is never an easy choice, but it can be the best way for many self-employed people to dig their way out of a deep financial hole.
If you are self-employed and considering declaring bankruptcy, you may be able to file Chapter 13 bankruptcy. This type of bankruptcy has numerous advantages over Chapter 7 and other types of bankruptcy and can be particularly useful for freelancers, sole proprietors, and other individuals who work for themselves. Here is why self-employed people should opt for a Chapter 13 bankruptcy.
Reorganization, Not Liquidation
Filing for Chapter 7 bankruptcy means selling most or all of your non-exempt assets in order to pay off your debts. If running your company requires any equipment or property that is considered non-exempt, losing these assets can sink your business and cripple your income.
Chapter 13 bankruptcy is sometimes referred to as 'reorganization bankruptcy', and may allow you to file bankruptcy without losing your property. Obviously, there are restrictions, and you will have to prove that you still have access to significant sources of income to be eligible for Chapter 13. You will also be ineligible for Chapter 13 if your debts are particularly high.
However, if you are able to file Chapter 13, you can work off your debts by paying your creditors a fixed amount each month. This amount is based on the value of your non-exempt assets. After keeping to a court-mandated repayment schedule for a few years, the remaining portion of your debts may be discharged, giving you and your business a fresh start.
No Income Ceiling
Running a one-person business can involve a lot of operating costs, and many self-employed people are forced to escape large operating debts through bankruptcy, even though they may still have access to a regular income stream.
If your business is still earning money, you may not be eligible for Chapter 7 bankruptcy simply because, on paper, your income is too high. Chapter 13 bankruptcy does not have an income ceiling, and you are much more likely to be deemed eligible for Chapter 13 if your business is still in operation.
Keep Your Mortgage And Your Home
If you have a mortgage on your home, filing for Chapter 7 can wipe out your mortgage debts. However, it does not prevent the mortgage lender from foreclosing on your home if you cannot make mortgage payments in the future. You may end up losing your home, which is hardly ideal if your home is also your place of business.
If you file for Chapter 13, your existing mortgage debts will be included as part of your structured repayment plan. This can be much more advantageous for self-employed debtors and allows you to keep working from home to pay off your debts over time, as long as your self-employment income is sufficient.
Contact a Chapter 13 bankruptcy lawyer for more information.