Filing bankruptcy while working in the gig economy

Are you part of the gig economy? Besides your regular job, are you also working with Uber, Lyft, Fiverr, or Task Rabbit? Even though you may be looking to make some extra money as a freelancer to pay down your credit card debt, that extra income could affect your bankruptcy case. Continue reading to learn how a bankruptcy case could be affected by income as a contract worker and what forms you’ll need to pay special attention to. 

The Means Test

To qualify for a Chapter 7 bankruptcy, there is a two-step process. Step one requires passing what is known as the Chapter 7 means test. The means test was established in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to prevent abuse of the bankruptcy system by folks who can afford to pay at least a part of their debts. The means test is a mathematical formula based on income that applies to people who are filing for bankruptcy due to personal debts and credit cards. 

The means test can be divided into two parts. The first part consists of the average gross income over the last six months. If your average gross income during this period is at or below the median income for a household the same size as yours, then you pass the means test. If your income is too high, then step two of the means test requires recalculating your income to include deductions such as income taxes and health insurance. Additional deductions are allowed for secured debt such as a mortgage or car loan. If you didn’t pass the second part of the means test, then you may need to proceed with a Chapter 13.

The Means Test and Timing

 Remember, the means test averages out your income over the last 6 months. Therefore, the more months that are included in the means test calculation where you’re earning less, works to your advantage to qualify for Chapter 7 bankruptcy. This includes periods of unemployment. While it may be financially difficult to file for bankruptcy during periods of unemployment or when you’re earning less, it does make passing the means test easier, especially if you get a job in the future that pays more. This is important because the means test doesn’t include future income, only past income.

If your average income based on the last 6 months includes a part-time job as a gig worker that you took only to keep up with minimum payments, your monthly income looks higher during the relevant period than if you just had your regular job/didn’t take on the extra gig work. This makes it look as though you make enough money to pay some of your debts through a Chapter 13 even thought that’s not really the case. In that case, if you know that Chapter 7 is right for you, consider cutting back on your freelance jobs to lower your income for a month or two and pass the means test.

Of course, if you just started working with Lyft, your average income for the means test won’t be impacted as much, as it’s only an average. If you made $600 your first month, that’s only a $100 / month increase in income on the means test. 

Schedule I - Your Income

After passing the means test, the next step is to calculate your current monthly income for Schedule I of the bankruptcy petition. With the means test, gross income is calculated based on the filer’s income in the 6 months before filing for bankruptcy. On Schedule I, the filer lists their average current monthly income looking forward. Let’s look at a couple of examples to illustrate the difference:

Person A: Just got a job that pays $2,000/mo. a month before filing. On the means test, her income is approximately $333/mo. because she’s only had one full month of employment so far. On Schedule I, her gross income is $2,000 because that’s what she expects to make every month going forward.

Person B: Has a regular full time job that pays $3,000/mo. and just started doing freelance work in the gig economy. He expects to be able to bring in another $1,000/mo. from his freelance gig as a graphic designer. Since the income he received in the month that he filed in isn’t part of the means test formula, his means test will show his income at $3,000/mo. and on Schedule I his income will be listed as $4,000/mo. because that’s what it will be going forward. 

Schedule J - Your Expenses

Schedule J of the bankruptcy petition is where all your expenses are listed. Some expenses will be easy to calculate such as rent or mortgage and car payments since it’s a fixed amount each month, however, other expenses fluctuate monthly. Review your bank statements to calculate the average costs of expenses such as utility bills, gas, and grocery bills. Remember to include occasional expenses like car maintenance and annual expenses like real estate taxes and insurance.  

Schedule I automatically includes your paycheck deductions for health insurance and state and local taxes, so don’t list this again on your Schedule J. But, If you’re an independent contractor, and taxes aren’t withheld from your paycheck, you will need to estimate how much you will pay in taxes and include that figure as a tax deduction for Schedule I. Since the amount is monthly, make sure to divide the full amount of your estimated taxes by 12 to get a monthly average.

Expenses related to your gig work

 You should list your monthly expenses what they actually are (on average). It’s important to note that the maximum amount of expenses that can be claimed on Schedule J is limited based on what is reasonable. Of course, an Uber driver will spend more on gas and vehicle maintenance each month than the average person. If you’re listing and expense that is higher than what’s reasonable (consider comparing to the IRS standards used on the means test to determine how far above or below you are) you may have to answer some additional questions. Be proactive by preparing an explanation supported with documents, such as receipts or bank statements. Make sure to review your bank statements starting from the date you started your gig economy job to calculate the increase in your monthly expenses.

Income versus expenses

Compare your income on Schedule I to your expenses on Schedule J. If you have too much money left over, you will not qualify for a Chapter 7 bankruptcy, even though you passed the means test. Person B in the above example now makes $1,000/mo. more than before - if that extra income leaves him with more than a couple hundred bucks after paying living expenses, he may be required to use that extra money to pay off some of his debts in a Chapter 13 bankruptcy instead. Therefore, even though you may have just started an on-demand type job such as a ride-sharing service or delivery service like Postmates, that extra income may prevent you from qualifying for a Chapter 7 bankruptcy. 

How bankruptcy exemptions can help you

Bankruptcy law provides certain protections for personal and real property known as exemptions. Bankruptcy exemptions vary from state to state since some states allow state exemptions and other federal bankruptcy exemptions. How much of your property is protected by an exemption depends on the value of the property minus what you owe, otherwise known as equity. For example, if your car is worth $8,000, but you owe $3,000, the equity is $5,000. In Florida, the car exemption is $1,000. Subtracting $1,000 from $5,000 leaves $4,000 in non-exempt equity. The non-exempt equity is what the bankruptcy trustee is entitled to. The trustee then uses that money to pay back a portion to creditors. 

However, sometimes additional exemptions can be claimed depending on the job and the state. For example, what if you are a mechanic or plumber and have $5,000 in tools? Some states allow for an additional exemption known as “tools of the trade.” In this scenario, the mechanic or plumber can apply the “tools of the trade” exemption to protect their property or tools and pay back less or not at all to the bankruptcy trustee, depending on the equity of the asset. The “tools of the trade” exemption can sometimes even be applied to cars that are used for business purposes. As an independent worker in the gig economy, this may help qualify you for a Chapter 7 bankruptcy.

Conclusion

With the new generation of millennials entering the labor market and gig economy workers becoming more common, finding employment with steady income is becoming increasingly difficult. While some states have increased minimum wage, household debt continues to rise, forcing many to consider bankruptcy. If you’re considering filing for bankruptcy, Upsolve is here to help you every step of the way whether you’re an independent contractor, a full-time employee, or your own boss trying to start or keep a small business. Our bankruptcy service is always free for those that qualify. Even if you don’t qualify for our service or want to talk to a bankruptcy attorney, we can also provide you with a free referral.