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How Being Self-Employed Influences Your Debt Relief Options

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In a Nutshell

If you're self-employed (as a sole proprietor, gig worker, or independent contractor) and you're struggling with business or personal debt, you can file personal bankruptcy like Chapter 7 or Chapter 13. If you have a separate business entity like an LLC or corporation, you also have the option to put your business into bankruptcy.

Written by the Upsolve TeamLegally reviewed by Attorney John Coble
Updated May 11, 2022


If you’re not a traditional wage earner who gets a W-2 from their employer in January every year, you may be confused about whether you’re self-employed, a sole proprietor, an independent contractor, a gig worker, or a small business owner. These distinctions matter when it comes to how you do your work and get paid. They also influence how you budget and what your debt relief options are. Let’s take a look at some important differences so you can map out your best path to lasting debt relief. 

What It Means To Be Self-Employed

If you’re the one who makes the rules about how, when, and what you do to make a living, you can comfortably consider yourself self-employed. There are many pros and cons to being self-employed, but that’s another story. For purposes of reviewing your debt relief options, all you have to know is that being self-employed is more of an umbrella term, rather than a separate status. Gig workers, independent contractors, and business owners are all some version of self-employed. The real differences kick in when we drill down a little further on how being self-employed works for you. 

Independent Contractor vs. Gig Worker

Independent contractors have one or more clients or customers they complete projects or assignments for in exchange for payment. They’re responsible for their own expenses, insurance, and taxes and receive a 1099 from each of their clients at the end of the year. Gig work, like driving for Uber, is a form of independent contractor work. So, if you’re in the gig economy and get a 1099 from your “employer,” you’re an independent contractor. Most independent contractors are also sole proprietors.

Sole Proprietors vs. LLCs and Corporations

Folks who own their own business can do so either as a sole proprietor or through a separate business entity like an LLC or corporation.

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How Do I Know if I’m a Sole Proprietor or Something Else?

If the only tax return you ever have to worry about filing is your personal one, you’re probably a sole proprietor. Sole proprietors own and run their own business. The business is an unincorporated entity, which means you and your business are one and the same. This is true even if you use a tradename or DBA (doing business as) for your business. In this case, you can file personal bankruptcy to get debt relief.

What if I Have an LLC or Corporation? 

If your business is a separate legal entity, you’re a small business owner. Your business may be an LLC or a corporation of some kind. If your accountant bugs you about K-1s, corporate tax returns, or anything along those lines, you fall into this category. In this case, you can either file personal bankruptcy or put your business entity into bankruptcy.

Should I File Bankruptcy if I’m Self-Employed? 

The answer to that question is “it depends.” You’ll want to learn about the different chapters of bankruptcy to see which is best for your situation. You can also read our article about filing for bankruptcy when you’re self-employed to get some helpful information on making this decision.

Let’s Summarize…

If you’re your own boss, your debt relief options differ depending on where on the self-employment spectrum you fall. Before you make any drastic decisions, make sure you understand which category you fall into. It can also be helpful to speak to an experiencedbankruptcy attorney. Many offer free consultations and can help you better understand your options even if you don’t choose to hire them.



Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney John Coble

LinkedIn

John Coble has practiced as both a CPA and an Attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more about Attorney John Coble

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