Obviously, self-employment can be quite a challenge. A sole proprietor or an independent contractor is likely to take some financial risks to get a business launched or to keep it operating in tough times. Those financial risks can sometimes become overwhelming, and bankruptcy may have to be considered. What does it take for a sole proprietor or for an independent contractor to declare bankruptcy?

First, a word about bankruptcy terminology. “Chapter 7” and “Chapter 13” are two of the fifteen chapters of the U.S. Bankruptcy Code, the set of federal laws that govern bankruptcy in the United States. The laws regarding personal bankruptcy are part of Chapter 7 and Chapter 13. A “Chapter 13 bankruptcy” will be right for many sole proprietors or independent contractors who are struggling with debt. A “Chapter 7 bankruptcy” will be right for many others.

And for other people who are self-employed, bankruptcy will not be the best option for dealing with debt. There may be a number of more practical alternatives. Obviously, everyone’s circumstances are different, so sole proprietors and independent contractors in this state will want to consult with an experienced Texas bankruptcy attorney before taking any irrevocable legal action.


An independent contractor or a sole proprietor who is intending to file for a Chapter 7 or a Chapter 13 bankruptcy must verify his or her income. Of course, every person who files for bankruptcy must verify income, answer a number of other questions, and produce a number of financial and legal documents. A taxpayer who earns wages can provide recent paystubs, W-2s, or tax returns. However, when someone is self-employed, verifying income may not be easy. Many self-employed individuals don’t keep detailed records of their earnings or their income tax information, and that makes bankruptcy much more difficult.


Bankruptcy courts require anyone who is filing for bankruptcy to report and document his or her average income for the previous six months. The bankruptcy court needs this verification to determine if a bankruptcy filer passes the “means” test for a Chapter 7 bankruptcy. When a Chapter 13 bankruptcy is the only option, income determines the shape and nature of the repayment plan that a Chapter 13 bankruptcy requires a petitioner for bankruptcy to create and follow.


Determining the average monthly income for an independent contractor or the sole proprietor of a business can be difficult, and in some cases, it can be exceedingly difficult because a self-employed person’s income is often irregular and may be in many cases undocumented. Failure to provide sufficient documentation – and any other mistakes or inaccuracies – will usually result in the dismissal of the bankruptcy petition.


If you are self-employed, whether or not you are struggling with debt and considering bankruptcy, you need to begin tracking and documenting your income if you are not doing so already. Routinely keep records of all of your income and your expenses. While you’ll need those records, a bankruptcy court will also require you to produce additional documents that verify and confirm your records. Those supporting documents can include:

  • Check stubs: Check stubs are perhaps the best way to verify income. Always save check stubs when you receive them. Whenever a self-employed person receives business income, it’s imperative to obtain some kind of proof of payment.
  • Bank statements: Bank statements verify income by tracking deposits of checks and cash.  If you have online access to your account, you can probably print out everything you’ll need from your bank.
  • Signed statements: If you receive cash payments, get a signed statement along with it, deposit the payment into a bank account, and attach the signed statement to your bank statement after making copies for your own records.
  • Tax returns. If your tax return covers the period of time six months prior to your bankruptcy, it is good documentation of your income.
  • Invoices and Contracts: Invoices and contracts can be used to help verify income and provide other details. If you are self-employed, and you do not currently create written invoices, start doing so immediately, whether or not you are considering bankruptcy.


People who are self-employed may wonder if creditors can attempt to garnish part of their income. The short answer is “no,” but there are exceptions. Only legal “employees” can have wages actually garnished, so self-employed individuals cannot be targets of wage garnishment.  However, creditors can still attempt to collect from self-employed persons by using what the law calls a “garnishment for property other than personal earnings” or a “non-earnings garnishment.”


A non-earnings garnishment is substantially different from a regular wage garnishment because it allows a self-employed individual’s creditors to take a one-time payment rather than a series of deductions from payroll checks. Many of the exemptions and protections associated with wage garnishment do not apply to a non-earnings garnishment, so it’s a handy tool for creditors, but it’s something everyone else should very much try to avoid.

For example, a wage garnishment can only seize twenty-five percent of an employee’s disposable income, but by using a non-earnings garnishment, a creditor conceivably could seize one hundred percent of the money allegedly owed – all at once. This could be catastrophic, so if someone anticipates that kind of action by a creditor, it’s important to talk with an experienced Texas bankruptcy attorney who may be able to offer some legal protection.

In a debt crisis, for some people in some circumstances, bankruptcy is the right and most responsible thing to do. Bankruptcy is always complicated, and if someone is a sole proprietor or an independent contractor, bankruptcy becomes even more complicated. Filing for bankruptcy is a personal choice and anyone who makes that choice must be certain that he or she fully understands both the negative and positive consequences of that decision.

If you are a self-employed business owner or contractor who is wrestling with overwhelming debts – and the debts are winning – bankruptcy can help you to deal with those debts and can put you on the path to a fresh financial start. It takes some patience and sacrifice, but thousands of self-employed people in Texas have been grateful that the bankruptcy option was available when they needed it.