Filing for bankruptcy can feel overwhelming, especially if you rely on a side hustle, freelance work, or a gig economy job to make ends meet. Many people worry that declaring bankruptcy will force them to give up their side income or small business.
The good news? In most cases, you can keep your side hustle—but there are important rules and considerations to keep in mind.
This article will explain how bankruptcy affects freelance work, gig economy jobs, and small businesses, what income and assets are protected, and how working with a bankruptcy attorney can help you navigate these complex issues.
When you file for bankruptcy, the court will assess your income, assets, and debts to determine how much you can repay creditors. If you have a side hustle or small business, the court will consider it part of your financial picture.
Here’s how different types of bankruptcy—Chapter 7 and Chapter 13—affect your side income:
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” discharges most unsecured debts like credit card bills and medical expenses. However, the court may liquidate non-exempt assets to repay creditors. If your side hustle involves owning valuable equipment or inventory, those assets could be at risk. For example:
However, many states offer exemptions that protect essential tools of your trade, up to a certain value. For instance, you might be able to keep your car or work equipment if it’s necessary for your side hustle and falls within exemption limits.
Your income from a side hustle will also be scrutinized. If your earnings are modest and primarily used to cover basic living expenses, they likely won’t affect your eligibility for Chapter 7.
However, if your side hustle generates significant income, the court might determine that you don’t qualify for Chapter 7 and instead need to file for Chapter 13.
Chapter 13 bankruptcy, or “reorganization bankruptcy,” allows you to keep your assets while repaying a portion of your debts through a court-approved repayment plan. Your side hustle income will play a key role in determining your monthly payment amount.
The court will calculate your disposable income—what’s left after necessary expenses—and use it to create a repayment plan that lasts three to five years.
If your side hustle income fluctuates, such as with freelance or gig work, this can complicate the process. You’ll need to provide accurate records of your earnings and expenses to ensure your repayment plan is fair and manageable.
Bankruptcy laws include exemptions that protect certain income and assets, allowing you to maintain your livelihood while addressing your debts. Here’s what you need to know:
The specific exemptions available to you depend on your state’s laws. A bankruptcy attorney can help you identify which exemptions apply to your situation and maximize the protection of your income and assets.
When you file for bankruptcy, you must disclose all sources of income, including earnings from your side hustle. This is true whether you’re filing for Chapter 7 or Chapter 13. Here’s what you’ll need to do:
If your income fluctuates, such as with seasonal gig work, your attorney can help you calculate an average income to present to the court.
Navigating bankruptcy while running a side hustle can be complex, but you don’t have to do it alone. A bankruptcy attorney can provide invaluable assistance in the following ways:
An attorney will help you identify and apply all available exemptions to protect your income and assets. This ensures you can keep the tools and resources you need to continue your side hustle.
Your attorney will guide you through the process of documenting and reporting your side hustle income, ensuring compliance with court requirements.
If your side hustle generates significant income, an attorney can help you determine whether Chapter 7 or Chapter 13 is the better option for your situation.
If your side hustle involves business debts, an attorney can negotiate with creditors to reduce or restructure what you owe.
Bankruptcy is a stressful process, but having an experienced attorney by your side can ease your worries and help you focus on rebuilding your financial future.
Filing for bankruptcy doesn’t mean you have to give up your side hustle. With careful planning and the right legal guidance, you can protect your income and assets while addressing your debts.
Whether you’re a freelancer, gig worker, or small business owner, understanding how bankruptcy affects your side hustle is key to making informed decisions.
If you’re considering bankruptcy, consult with a bankruptcy attorney who can help you navigate the process and ensure your side hustle remains intact.
Remember, bankruptcy is not the end—it’s a fresh start, and your side hustle can be an important part of rebuilding your financial life.
It’s important to hire an experienced bankruptcy attorney as one of the steps to take when you’re facing bankruptcy and you need solid guidance and representation.
This is because there are many different types of bankruptcy. Only an experienced lawyer will know which one would work best for your specific situation.
It might seem like it makes sense to do this yourself. But most people don’t have the time or patience to understand all of the intricate details involved in bankruptcy.
That means they make mistakes by not choosing the right type, or by not filling out paperwork correctly. Both things could lead to delays and ultimately hurt your chances of getting any debt relief at all.
This is not a journey to take lightly, but it is also not one to take alone. If you need to file for bankruptcy, reach out to us today to start your journey with us.
If you want to learn more about the options you have and the steps to take, call us for a free consultation.
Parker and DuFresne
