Bankruptcy is a tricky situation no matter how you look at it, and anytime someone is thinking about filing for bankruptcy, there is a lot to consider. Chapter 13 bankruptcy is no different. A common question that is asked is if you can file for Chapter 13 bankruptcy as a self-employed individual. This is not as easy an answer as it might seem.
Can you file a Chapter 13 debt consolidation case if you are self employed? Yes, you can but expect the process to be more difficult, burdensome and expensive than it would be if you are a salaried employee.
Chapter 13 works best when your income and expenses are steady and consistent. When you file Chapter 13 you will be proposing a repayment plan to the bankruptcy judge. Your plan modifies the rights of your creditors and it must meet all the requirements of the bankruptcy code.
When you file your case, a Chapter 13 trustee will be assigned to verify the information you submit and to investigate your plan to make sure that you are contributing all of your disposable income into the plan.
Your creditors will get notice of your plan and they will review it for possible objections as well.
If you are a salaried employee, your income is what it is and your expenses are usually consistent month to month. When you are self employed, however, your income may go up and down, and your expenses may also vary.
Recently, for example, I represented a truck driver whose income is dependent on how many miles he drives. His expenses also change depending on the cost of fuel, the number of weigh station tickets he pays and the amount of tolls he pays in certain states. His gross income month to month can vary by as much as $2,000. Sometimes his income falls to zero if truck is in the shop.
The trustee in our case wanted extensive documentation – proof of gross receipts, proof of expenses, proof of a tax escrow, and copies of past years’ tax returns. My client, the truck drive, is on the road most of the month and finding and providing this paperwork was a huge burden on him.
When I finally got the paperwork I needed, I presented a budget to the trustee using our best estimate for what we hoped and expected to be reliable income. Not surprisingly the trustee objected claiming that our estimate was too low.
Our trustee and most Chapter 13 trustees would take the position that we should use the last 3 to 6 months to arrive at an average income, even if the debtor now works for a different trucking company with different mileage reimbursement rates and different out of pocket costs.
“File an amended plan, serve all creditors and present your request for a lower payment to the judge when you have unexpected expenses,” said the trustee. Happy to do so, I replied, but that will add $500 to $ 750 to the cost of the case since court calendars where I practice can last 4 to 5 hours. “Your client wants to reorganize,” says the Chapter 13 trustee, “this is what he has to do.”
Imagine significant income changes every year during the 5 year term of the plan. This could add thousands of dollars to the cost of the Chapter 13.
In my experience, Chapter 13 cases filed by self employed people are much more expensive and complicated than those for a salaried employee and have a very low success rate. So, if you are self employed and you choose to file Chapter 13, enter into the process knowing the risks.