1099 Contractor Bankruptcy: What You Need to Know
Independent contractors can file bankruptcy just like traditional employees. Your variable income requires more documentation and strategic timing to pass the means test. Calculate your six-month average carefully and consider filing after slow seasons to maximize your chances of Chapter 7 qualification.
Get Free ConsultationBankruptcy provides relief for everyone drowning in debt. Your employment status does not matter. You can file whether you are an employee, freelancer, or both.
Many people juggle multiple jobs. Some earn tips instead of wages. Working as a 1099 contractor instead of a W-2 employee is common.
Unsure Which Bankruptcy Chapter Fits Your 1099 Income?
Calculating your means test as a contractor can be complex. Speak with a bankruptcy attorney for free to understand whether you qualify for Chapter 7 or need Chapter 13.
Check Your Eligibility NowThe bankruptcy process is mostly the same for contractors and full-time employees. A few key differences exist. You must prove eligibility when your income fluctuates. You need to time your filing strategically.
Understanding 1099 vs. W-2 Workers
Independent contractors receive 1099 forms. You work project by project under individual contracts. Your employment ends when each contract completes. You may work for multiple businesses in a single year. Your income varies based on available work. Most gig workers fall into this category.
W-2 employees receive regular paychecks. You earn hourly wages or a fixed salary. Your job continues until you quit or get terminated. Your income stays predictable month to month.
Step 1: Calculate Your Total Income
Why Income Verification Matters
The court needs proof of your actual earnings. Your verified income determines which bankruptcy chapter you qualify for. Income limits apply the same to 1099 and W-2 workers. Totaling your income as a contractor requires more documentation.
Documents You Can Use
You can verify your 1099 income with various documents. Gather some or all of these items:
- Checks or electronic payments received
- Profit and loss statements
- Bank statements covering the relevant period
- Tax returns from the same timeframe
- Invoices, contracts, or signed agreements
Combine these resources to calculate your total earnings. Higher income may push you toward Chapter 13 instead of Chapter 7. The means test determines which path you take.
Step 2: Pass the Means Test for Chapter 7
Chapter 7 bankruptcy requires passing the means test. Your income and expenses determine your eligibility.
How the Means Test Works
The means test examines your average income over six months. You must look at the six months immediately before filing. Your calculation produces your Current Monthly Income (CMI).
Regular employees simply add up six paystubs. They divide by six and get their average. Simple and straightforward.
Contractors face a more complex calculation. Your income varies from month to month. Paystubs do not exist. You must use alternative documentation from the list above.
Calculating Your Current Monthly Income
Include all income sources in your calculation. Add money from family members or friends. Count unemployment benefits. Social Security income is the one exception you can exclude.
Total all income from the past six months. Divide that number by six. You now have your average monthly income for the means test.
Meeting the Income Threshold
You automatically qualify if your income falls below your state’s median. The median varies by location and household size.
Income above the median does not disqualify you immediately. Complete part two of the means test. Your allowable expenses may still let you qualify.
Failing both parts means Chapter 7 is not available. You would need to pursue Chapter 13 bankruptcy instead. Speaking with a bankruptcy attorney for free can help you understand your options.
Step 3: Time Your Filing Strategically
Seasonal income creates special challenges. Strategic timing becomes critical.
Filing right after your busy season seems logical. Your income during those six months will be much higher. The court will calculate a CMI that does not reflect your typical earnings. You may not qualify for Chapter 7 even though you actually need it.
Waiting a few months after your peak season helps. Your CMI drops as low-income months replace high-income months. Run the means test again. You may now qualify for Chapter 7.
Contractors Deserve Bankruptcy Relief Too
1099 contractors have the same bankruptcy rights as traditional employees. Your path involves more documentation and careful timing. You can successfully navigate the process with attention to detail. Bankruptcy relief remains available to you.