You are self employed and trying to escape debt, but are finding that you may have to consider bankruptcy.
If so, comprehending how your income will impact your qualification for the means test is paramount.
The means test is a critical component of Chapter 7 bankruptcy that aims to determine if you're qualified for Chapter 7 or if you should consider filing for Chapter 13 bankruptcy.
The Means Test Unpacked
The means test is a formula that analyzes your income, expenses, and additional factors to determine whether you possess the financial ability to repay some or all of your debts. It's specifically used to establish whether you meet the eligibility criteria for Chapter 7 bankruptcy, which is designed for individuals unable to repay their debts.
To qualify for Chapter 7 bankruptcy, passing the means test is a prerequisite. However, if you're unable to pass the means test, you can still file for bankruptcy under Chapter 13 bankruptcy, which is designed for individuals with regular income capable of repaying some or all of their debts within three to five years.
Chapter 7 Means Test Calculator Calculation
When using a Chapter 7 means test calculator, it's crucial to consider all sources of income, including your self-employment income. This comprises any income you generate from your business or freelance work, along with other sources of income like rental income, investment income, or alimony or child support.
To calculate your self-employment income for the means test, you'll need to assess your business's gross income, which is the total amount of money your business earns before deducting expenses. Once you've established your gross income, you'll then deduct certain allowable expenses, such as business-related expenses, to arrive at your net income.
Parts of the Means Test
The means test is a formula that takes into account an individual's income, expenses, and other factors to determine their ability to repay their debts. The calculation of the bankruptcy means test is divided into two parts: the first part is used to determine whether an individual's income is above or below the median income for their state, while the second part is used to assess an individual's ability to repay their debts.
Part 1: Income Comparison
The first part of the bankruptcy means test compares an individual's income to the median income for their state. If an individual's income is below the median income, they're typically eligible for Chapter 7 bankruptcy. However, if an individual's income is above the median income, they may still be eligible for Chapter 7 bankruptcy, but they'll need to complete the second part of the means test to determine their eligibility.
Part 2: Ability to Repay
The second part of the bankruptcy means test assesses an individual's ability to repay their debts. This calculation takes into account an individual's income, expenses, and other factors to determine their disposable income. Disposable income is the amount of income an individual has left over after paying their necessary living expenses, such as rent or mortgage payments, utilities, and food.
If an individual's disposable income is below a certain threshold, they're typically eligible for Chapter 7 bankruptcy. However, if an individual's disposable income is above the threshold, they may not be eligible for Chapter 7 bankruptcy and may instead need to file for Chapter 13 bankruptcy.
Other Factors Considered in the Means Test
In addition to income and expenses, the means test also takes into account other factors, such as the size of an individual's household and their secured and unsecured debts. Secured debts are debts that are backed by collateral, such as a car or a house, while unsecured debts are debts that are not backed by collateral, such as credit card debt.
Deduction of Allowable Expenses
When calculating your net income for the means test, certain expenses related to your self-employment income are deductible. These expenses include office rent, utilities, equipment, and supplies. Additionally, expenses related to your vehicle, such as gas and maintenance, are deductible if you use your vehicle for business purposes.
Nevertheless, it's important to note that the means test only allows for the deduction of specific expenses, and some expenses may not be allowable. For instance, the means test may disallow certain expenses that are considered excessive or unnecessary.
Collaborating with an Attorney
Suppose you're self-employed and considering filing for Chapter 7 bankruptcy. In that case, working alongside an experienced bankruptcy attorney is imperative. Your attorney can guide you through the means test and ensure that you're taking advantage of all available deductions. Additionally, your attorney can provide insight into the eligibility requirements for Chapter 7 bankruptcy and help you determine if it's the most suitable option for your financial future.
Pros and Cons of Filing Bankruptcy When Self-Employed
As a self-employed individual, filing for bankruptcy can have significant consequences for your business and personal finances. While bankruptcy can provide much-needed relief from overwhelming debts, it's important to carefully consider the pros and cons of filing for bankruptcy before making a decision.
Pros of Bankruptcy for Self-Employed
Discharge of Debts: One of the biggest advantages of filing for bankruptcy is that it can discharge or eliminate most, if not all, of your debts. This can provide a fresh start for your business and allow you to focus on rebuilding your finances. For example, some may say that you should never pay a debt collection agency, and bankruptcy allows debt relief from those debt relief agencies.
Protection from Creditors: Filing for bankruptcy can provide protection from creditors and collections agencies. This can help prevent your business from being seized or your personal assets from being garnished.
Repayment Plans: If you file for Chapter 13 bankruptcy, you may be able to develop a repayment plan that allows you to pay back your debts over a period of three to five years. This can be beneficial for self-employed individuals who have a steady income but are struggling to manage their debt load.
Cons of Bankruptcy for Self-Employed
Impact on Credit Score: Filing for bankruptcy can have a significant impact on your credit score and can remain on your credit report for up to ten years. This can make it difficult to obtain credit in the future and may impact your ability to secure business loans or other financing.
Loss of Assets: Depending on the type of bankruptcy you file for, you may be required to liquidate some of your assets to pay back your creditors. This can be particularly challenging for self-employed individuals who rely on their business assets to generate income.
Reputation Damage: Filing for bankruptcy can also damage your reputation as a self-employed individual. This can make it challenging to attract new clients or customers and may impact your ability to grow your business in the future
In Conclusion
Self-employment income can significantly affect your eligibility for Chapter 7 bankruptcy. Therefore, it's vital to consider all sources of income, including your self-employment income, when calculating your income for the means test. Deducting certain allowable expenses is also necessary to arrive at your net income. Collaborating with an experienced bankruptcy attorney is crucial in ensuring that you're taking advantage of all available deductions and making informed decisions regarding your financial future.