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I’m a 1099 Contractor. How is My Bankruptcy Different?

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In a Nutshell

Much of the bankruptcy process is the same for people who are a full-time employee and people who are contractors. However, there are a few differences. When your income is not regular or easily predicted, you must demonstrate that you are eligible to file and ensure that it makes sense to file when you do.

Written by Attorney Eva Bacevice
Updated August 7, 2020

Bankruptcy is a safety net for people who need to get out of debt and back on their feet. This does not depend on whether you’re an employee, a freelancer, or even both at the same time.

Many people have more than one job. Some people are paid in tips rather than wages. It is not at all uncommon to have someone work as a 1099 contractor rather than as a W-2 employee.

Much of the bankruptcy process is the same for people who are a full-time employee and people who are contractors. However, there are a few differences. When your income is not regular or easily predictable, you must demonstrate that you are eligible to file and ensure that it makes sense to file when you do.

The Difference between a 1099 and a W-2 worker

Someone who receives a 1099 is an independent contractor hired one project (or contract) at a time. They are not an employee of the company and their employment stops when the contract is complete. A 1099 worker may have multiple contracts with multiple businesses over a single year and their income varies accordingly. Most gig employees are 1099 workers.  

Someone who receives a W-2 is an employee and is paid either hourly wages or a salary. A W-2 employee expects that their job and salary will continue until they leave or are let go from a position.

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1. Calculate how much you make: Income Verification

What is Income Verification?

Income verification is - exactly what it sounds like - how the court goes about confirming that you make as much as you say you do.

Income verification is important because it will determine which bankruptcy chapter you can file under. The rules for how much you can make do not change whether you’re a 1099 or a W-2. However, if you are a 1099 contractor or self-employed, adding up all of your income might be a bit more complicated.

How Do I Verify My Income?

As a 1099 contractor you can provide a number of different documents to verify your income. You can use some or all of the following:

  • Checks or payments to you

  • A profit and loss statement

  • Bank statements for the time period in question

  • Tax returns (especially if the timing matches up)

  • Invoices, contracts, or signed statements

You can use any combination of these resources to total up the money that you make. In some situations, if you make over a certain amount, you might be forced to file a Chapter 13 instead of a Chapter 7.

So, how do you know?

2. Check If You Qualify: The Means Test in Chapter 7

In order to file a Chapter 7 case, you have to qualify using something called the “Means Test.

What Is the Means Test?

The Means Test looks at your average income and expenses over the 6 months right before you filed. This is the period that runs right up until your filing date. The amount provided after doing the Means Test is called your Current Monthly Income.

For a traditional employee with a regular paycheck, this is pretty straightforward. You can simply provide your last six months worth of paystubs, which are probably for the same amount each time and the same frequency. Divide the total number by 6 (months), and there you go!

When you are a 1099 contractor this gets a bit more complicated. As a 1099 contractor, your income isn’t always rarely regular or consistent. Since regular paystubs are not always an option, you will need to provide other proof of income from the list above.

Determining your Current Monthly Income

You should always include all income that you receive -- including if you are receiving regular income from a family member or friend, or unemployment income. The Means Test, however, does explicitly exclude Social Security Income.

Once you have compiled the relevant documentation to complete the Means Test you should add up all the income from the past 6 months and then divide by six to come up with the average income you make per month. This is what you can use for your Current Monthly Income in the Means Test.

Qualifying under the Means Test

You could qualify immediately under the Means Test if your income is below the median for your location and household size.

If you you are above that threshold, you can complete the second part of the Means Test to see if you still are able to qualify as a result of your allowable expenses.

If you still do not qualify under the calculated Means Test then you are facing a position where you might need to file a Chapter 13 case instead.

3. Time Your Filing: Seasonal workers

What if your 1099 income is mainly seasonal?

If the bulk of your income is earned during a particular season, you might think it’s best to file right after your busy season. However, if your income is irregular your CMI is probably going to be much higher than it would be in the middle of winter because you’ve worked that last six months. The court is going to think that is the amount that you consistently make throughout the year. In this circumstance it may make more sense to wait a month or two and then try the Means Test again to see if you now qualify for a Chapter 7 case instead.

Your Bankruptcy Isn’t That Different If You’re a 1099 contractor

Americans who earn income as 1099 contractors are just as entitled to bankruptcy relief as any other wage earner. While the process can get a bit more complicated to successfully demonstrate your income, it can be handled with a bit of patience and attention to detail.

Written By:

Attorney Eva Bacevice


Eva G. Bacevice graduated from the University of Michigan Law School in 2001. She practiced law for close to a decade in the area of consumer bankruptcy. She now works in higher education as an Academic Advisor for undergraduate students at the Stephen M. Ross School of Business,... read more about Attorney Eva Bacevice

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