Can I File for Bankruptcy if I’m Self-Employed?


If you are currently employed in New Jersey, you’re either considered a traditional “W-2 employee” or an independent contractor. If you report to the same location every day where you work on tasks assigned to you by your boss or other superior and you receive a paycheck (typically) every two weeks from the payroll department, you’re an employee.

On the other hand, if you provide services for clients without taking direction from anyone and clients pay you directly – you are an independent contractor. Sometimes independent contractors are referred to as freelancers or “1099ers”.

Both categories of workers described above are required to pay income taxes and file yearly tax returns at the state and federal level. Traditional employees will be given a W-2 form by their employers. The W-2 form explains how much of an employee’s salary was withheld and used to pay income taxes. It is very useful when filing taxes, as it tells the employee exactly how much they still owe in taxes for the year, or how much they overpaid, which will be paid back to them in the form of a refund.

If you’re an independent contractor, you don’t have an employer to keep track of your income and tax withholdings. It is your responsibility to maintain accurate income records and make either estimated income tax payments in quarterly installments or one lump sum income tax payment at the time that you file your tax return.

Just as filing income taxes is more complicated if you’re an independent contractor, the same is true if you plan to file for bankruptcy. In fact, a major determinant of whether or not you will qualify to file for bankruptcy is your income. You will be asked to accurately report your income on your initial bankruptcy paperwork regardless of your employment status.

Although it will be more difficult to accurately prove your income as an independent contractor, it is most definitely within your rights to file for bankruptcy. You simply have to be more diligent about providing proof of your income. Falsely representing your income in a bankruptcy proceeding (even accidentally) is reason for dismissal of your case.

Today, many people work as freelancers all around the world, and technological advances in banking have made documenting your independent income totally plausible. If you have clients who pay you using a variety of payment methods, you can report your income by providing a copy of your bank account statement. It is imperative that you maintain a separate bank account where all of your income will be deposited.

Regardless of how your clients pay you (paper check, PayPal, Square Up, etc) – make sure that you then deposit that money immediately into a bank account that is designated for income. Do not deposit any money into that account that isn’t income from your job as an independent contractor. That makes filing your taxes, and in this case, filing for bankruptcy, much easier because there will be a record of all of your income.

Standard employees and freelancers alike all have to pass the New Jersey Means Test in order to be approved to file for bankruptcy. Filing for bankruptcy as an independent contractor adds a level of difficulty into the process that could easily cause you to make fatal mistakes that can result in dismissal of your case.

Talk to a New Jersey bankruptcy attorney before you file any paperwork on your own. Even if you simply take a free consultation (offered by many attorneys), you will walk away with valuable information and the understanding that, instead of being unable to afford an attorney, you actually can’t afford to proceed without one.

Image credit: Ray S.

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