Bankruptcy Basics – How does the 2005 Bankruptcy Act treat self-employment income for purposes of determining if a debtor qualifies for a Chapter 7 bankruptcy?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 introduced significant changes to bankruptcy laws, including the treatment of self-employment income for Chapter 7 bankruptcy eligibility.

Under the 2005 Act, debtors must pass a means test to qualify for Chapter 7 bankruptcy. This means test evaluates the debtor’s income and expenses to determine if they have enough disposable income to repay their debts under a Chapter 13 repayment plan.

When it comes to self-employment income, the means test considers the debtor’s average monthly income over the six months preceding the bankruptcy filing. This includes income from self-employment, such as freelance work, business ownership, or consulting fees. If the debtor’s income exceeds the median income for their state, they may not qualify for Chapter 7 bankruptcy unless they can demonstrate that their expenses or special circumstances warrant an adjustment.

Thus the 2005 Bankruptcy Act treats self-employment income like any other income for the purpose of determining Chapter 7 bankruptcy eligibility, subjecting it to the means test along with other sources of income.