The gig economy is growing, with more people taking on freelance work and forming their own businesses. These businesses are usually in the form of sole proprietorships with little in the way of legal protections like incorporation. For many, this isn't an issue; they're running very low-key businesses that don't need to become corporations, and the business income is their personal income. But for those who fall on hard times, however, those low-key businesses could be targets of the trustees and court who decide whether or not to approve a bankruptcy.
Many Assets Could Be the Key
As bizarre as it may sound, there is the risk that you could be asked to close your business as part of the bankruptcy proceedings, especially if you file for Chapter 7. This mainly has to do with the assets in the business. For example, if you don't have a lot of income and need to wipe out bills, but your business has several expensive pieces of equipment, vehicles other than your personal car, and so on, those are potential targets for sale so money can go back to your creditors. However, that does not mean that your business has to be closed.
Taking Away Your Income
One of the problems that faces the trustees and the court when they decide what to do with your business is that, if you have to close your business, you lose your source of income. That could get you into even more financial trouble because you'd have no money coming in. The court should look at what caused the debt problem and whether the business income can support you personally; for example, if you're filing for bankruptcy because of medical debt, forcing you to lose all your income makes no sense. On the other hand, if you have no income coming in from the business but do have a full-time W-2-type day job, closing the business to sell the assets (if there are a lot of assets) may not hurt you that much.
If there are indications that the court may ask you to close your business so that the assets can be used to pay part of your debt, talk to your attorney immediately about trying to keep the basic business open. One option is to look at Chapter 13 instead of Chapter 7, but even with Chapter 7, the court should be aware that you still need to earn money to support yourself after the bankruptcy -- and that finding a "real job" that can actually support you isn't as easy as many people think it is.
Basic Bankruptcy Exemptions
When you file for a personal bankruptcy, you do get to have some of your belongings exempted from the inventory of your assets. Your attorney can guide you through the process of inventorying everything you own and subtracting those items that qualify for an exemption. After all, a bankruptcy is not meant to take away everything you own. It's not meant to strip you down to two pairs of pants and three shirts with nothing else to your name. And if your business is small enough, such as a freelance writing business where your assets are a basic computer and some writing manuals, those are likely going to fall under the exemption.
Do not let this worry you. Many people file for bankruptcy, get approved, and still get to keep their businesses. You just need to be aware of the risk so that you can discuss what to do when you consult a bankruptcy law firm -- and so you do not attempt to file for bankruptcy without legal help.
