Bankruptcy for the Self Employed: Verifying Your Income

A self-employed person can file a Chapter 7 or Chapter 13 bankruptcy, but the debtor must determine and prove average income for the six months before the filing of the case.

If you are an independent contractor or otherwise self-employed and are planning to file for Chapter 7 or Chapter 13 bankruptcy, you will have to verify your income. Although all bankruptcy filers must report and document their income, this requirement can be tricky for the self-employed. Read on to learn why you must document your income, and how to do so if you are self-employed.

Why Income Verification Is Required in Chapter 7 and Chapter 13 Bankruptcy

Under both Chapter 7 and Chapter 13 bankruptcy, you must report and document your average income for the six months before the filing of the case. Bankruptcy courts require this in order to determine whether you qualify for a Chapter 7 bankruptcy under the “means test.” (To learn more, see the Means Test.)  In Chapter 13 bankruptcy, your income is important as well. It determines whether you can fund a plan, how long your plan will last, and how much you must pay to nonpriority, unsecured creditors. (To learn more, see our Chapter 13 Repayment Plan topic area.)

How to Verify Income If You Are Self-Employed

Determining average monthly income for the independent contractor or self-employed can be difficult, especially since income can be irregular and undocumented.  Failure to provide documentation or incorrect calculation can result in dismissal of the bankruptcy case.

If you are self-employed and considering bankruptcy, you should begin tracking and documenting your income.  

Tracking Income

You can track income by keeping regular records of income and expenses, or creating profit and loss statements.  Because these types of records are created by you, however, they are subject to question by the bankruptcy court.  Accordingly, back up documentation is necessary.

Providing Supporting Documents

Here are several ways to verify your income for the bankruptcy court.

Check stubs.  This is probably the best way to verify income. Be sure to always save check stubs to support your income statement. If check stubs cannot be obtained, you can try to obtain proof of payments from the payor.

Bank statements. These can be used to verify income by tracking deposits of checks or cash.  Copies of checks can be obtained from the bank.  If you have online access to your account, you probably can obtain the checks and print them from your computer.     

Signed statements. If you receive cash payments, get a signed statement from the payor, deposit the payment into a bank account, and attach the signed statement to your bank statement. 

Tax returns. If your tax return covers the time period six months prior to your bankruptcy, it is a good way to provide documentation of your income.  

Invoices and Contracts:  If available, invoices and contracts can be used to help verify income.  If you do not currently create written invoices, start doing so immediately in anticipation of filing for bankruptcy.

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