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If you own your own business and you’ve seen a slump in your profits you may feel like you’re drowning. Creditors are demanding repayment. Customers are scarce. You may even want to stop the money hemorrhaging and start over. Sometimes that is the best decision, to file for bankruptcy and start over. A Massachusetts bankruptcy attorney can advise you of your options. Here, we’ll look at how that might work out.
The Influence of Business Structure on Bankruptcy Filing
Bankruptcy looks different for different kinds of businesses. A corporate bankruptcy has its own rules, and we won’t discuss those here. If you’re self-employed, your choices likely are to file a Chapter 13 or Chapter 7. In either case, you will have to provide the trustee with several years’ worth of income documentation before the case gets filed. Most people who are employed by someone else can provide pay stubs but if you are self-employed it’s different. You will also be tasked with providing proof of your income for the six months before filing. That will involve gathering up tax returns, bank statements, payment receipts, and possibly P&Ls (profit and loss statements).
The Necessary Steps for Filing Bankruptcy as a Self-Employed Person
Most business transactions now happen electronically, not using cash. That should make it easier to track down your profits and losses even if you haven’t kept good records. Here are some things to gather:
- Banking statements (business and personal) going back three years
- Three years of check stubs, invoices, contracts, receipts for any cash payments
- Tax returns going back two years for Chapter 7 and four years for Chapter 13
If you don’t already have P&L statements you will need to construct them and this documentation will be the basis of those. At the first creditors meeting you will need those P&Ls. If you are even thinking about filing bankruptcy but unsure if it’s the best course of action, you will want to locate as much of this kind of documentation as you can before you even see a lawyer.
Chapter 7 vs. Chapter 13: Which is Suitable for the Self-Employed?
When you’re self-employed and considering bankruptcy, you have a couple of main options: Chapter 7 and Chapter 13, and each serves a different purpose depending on your situation.
Chapter 7 Bankruptcy
This is what you’d call a straight-up “wipe the slate clean” kind of deal. If you go for Chapter 7, it might mean selling off your business assets to pay your debts, which can make continuing your business tricky unless you’ve got assets that are protected under bankruptcy exemptions. Also, you’ll need to qualify for this type by passing a means test, which looks at your income to see if it’s low enough to file under Chapter 7.
Chapter 13 Bankruptcy
Think of Chapter 13 as the “keep things going” option. It’s for folks who have a steady income and can stick to a repayment plan. If you’re self-employed and want to keep your business running, this might be the way to go. You get to reorganize your debts and pay them off over time, usually three to five years, while keeping your assets.
Working with a Trustee
No matter which type you choose, a trustee gets involved. In Chapter 7, they handle selling your stuff, and in Chapter 13, they manage the repayment plan, collecting your payments and sending them off to your creditors.
Bankruptcy can get complex fast, so having a lawyer to help you talk things through with the trustee and sort out your best move can be a lifesaver. They’ll help make sure you’re on the right path and that you understand all your options.
So, if shutting down isn’t in your game plan but reorganizing debt is, Chapter 13 could be your best bet. If you’re looking to close the books and start fresh, and you qualify, Chapter 7 might be your ticket.
Get the Right Legal Assistance: Consult a MA Bankruptcy Attorney
Although there are plenty of online resources for those who choose to file their own bankruptcy, even the bankruptcy court acknowledges that due to the complexity of bankruptcy, that’s not a good idea. The court cannot give you legal advice. An experienced, qualified attorney will represent you and help you navigate the choppy waters of bankruptcy. Contact us today to learn your options.