§ 12.1     Self-Employment
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 12.1, at ¶ ____, LundinOnChapter13.com (last visited __________).

Self-employed individuals, including attorneys, real estate salespeople, contractors and others who generate their own income, can have regular income for Chapter 13 purposes even though they are essentially writing themselves a paycheck.1 The debtor has the burden to demonstrate that self-employment income is sufficiently regular and stable to make plan payments.2


A self-employed debtor who does business in partnership with others may have to demonstrate that the partnership will distribute enough income to fund a Chapter 13 plan. For example, in In re Ross,3 the debtor and his son were in a business partnership. The son handled the finances. At the end of each year, the debtor and his son would “settle up,” but the son would determine the amount of income that each received. The bankruptcy court concluded that the debtor did not have regular income because there was no proof that the son would allocate enough income to the debtor to fund a Chapter 13 plan.


That the debtor controls the timing and amount of income does not render the income any less regular. The regularity of income will be somewhat more suspect if the self-employed individual has a history of withdrawing money for personal use whenever necessary, without any particular pattern. To qualify for Chapter 13 relief, it may be necessary for the debtor to commit to regular draws. More as a matter of feasibility4 than as a matter of eligibility, the debtor will have to prove that the self-employment can produce enough regular income to fund a Chapter 13 plan. A “start-up” business is particularly troublesome. It is not enough that the debtor intends to be self-employed in a business. The debtor must also demonstrate the ability to produce sufficient income from the new business to fund a Chapter 13 plan.5


There is a technical difference between a self-employed debtor and a debtor “engaged in business.” 11 U.S.C. § 1304(a) states a debtor “that is self-employed and incurs trade credit in the production of income from such employment is engaged in business.” There are self-employed individuals who do not incur trade credit who have regular income and meet other Chapter 13 eligibility requirements but are not technically “engaged in business.” Chapter 13 authorizes a debtor engaged in business to continue to operate the business of the debtor.6 There is no specific Code provision authorizing a self-employed individual who is not engaged in business to continue to operate a business. There is no obvious logic to this oversight. A self-employed debtor who operates a business without incurring trade credit is no more or less an “individual with regular income” for whom Chapter 13 was intended. It is likely that a court would find such a debtor eligible if the debtor’s business could fund a Chapter 13 plan, without regard to whether the debtor incurs trade credit. Because the Chapter 13 trustee is not authorized to operate the business of a debtor,7 courts should allow debtors to continue to operate their businesses even if they do not incur trade credit.


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)8 may have imposed a penalty on some self-employed debtors. Detailed elsewhere,9 after BAPCPA, the calculation of current monthly income (CMI) determines whether a debtor will have an “applicable commitment period”10 of three years or five years. Debtors with CMI greater than “applicable median family income” must propose a plan with an applicable commitment period of five years.11 Under 11 U.S.C. § 101(10A), the calculation of CMI is based on average income from all sources during the six months before the petition.12 There is nothing in the statutory definition of CMI to suggest that “income” is net of expenses for a self-employed debtor or for a debtor engaged in business. Expenses—including expenses of a business—are accounted for later in the calculation of “disposable income” at confirmation under § 1325(b).13 In other words, after BAPCPA, self-employed debtors calculate the applicable commitment period for confirmation of a plan based on gross income before deduction of the expenses of any business that produced that income.


It should be admitted that the forms drafters take issue with this interpretation and have provided otherwise in Official Form 122C-1.14 But a majority of courts agree that business expenses are not deducted to determine CMI for a self-employed debtor or debtor engaged in business.15 The result of this reading of the Code is that business debtors are more likely to have CMI greater than applicable median family income and to have five-year applicable commitment periods without regard to how profitable the business may be. Chapter 13 business debtors with low margins and small net incomes are penalized by BAPCPA with a longer five-year applicable commitment period.


1  See In re Goodrich, 257 B.R. 101, 104 (Bankr. M.D. Fla. Dec. 13, 2000) (Proctor) (Self-employed real estate agent has regular income because at the time of the confirmation hearing the debtor was “substantially current with his plan payments. . . . [T]herefore . . . Debtor has the ability to make the payments under the plan.”); In re Griggs, 181 B.R. 111 (Bankr. N.D. Ala. Sept. 15, 1994) (Cohen) (At conversion from Chapter 7 to Chapter 13, debtor’s employment as a “construction supervisor” with a net monthly income of $1,376.22 qualifies the debtor as an individual whose income is sufficiently stable and regular to make payments under a Chapter 13 plan.); In re Monaco, 36 B.R. 882 (Bankr. M.D. Fla. Nov. 2, 1983) (Paskay) (self-employed construction business); Margraf v. Oliver, 28 B.R. 420 (Bankr. S.D. Ohio Feb. 24, 1983) (Anderson) (self-employed real estate salesman); In re Wilhelm, 6 B.R. 905 (Bankr. E.D.N.Y. Nov. 12, 1980) (Goetz) (Self-employed individuals are eligible.); In re Ballard, 4 B.R. 271 (Bankr. E.D. Va. May 14, 1980) (Shelley) (self-employed attorney).


2  See Sullivan v. Java Oil Ltd. (In re Sullivan), No. CIV S-06-20-LKK, 2006 WL 1686732, at *2 (E.D. Cal. June 20, 2006) (unpublished) (Karlton) (Debtor’s concession that “his real income will come from contingency fee cases” supports finding that “there appears, then, nothing regular about [debtor’s] income.” Debtor failed to disclose his spouse’s income, did not disclose his own income for previous years and misstated the “nature, sources and regularity of his alleged income.”); In re Kollar, 357 B.R. 657 (Bankr. M.D. Fla. Oct. 5, 2006) (Briskman) (Fees as an “independent contractor” are not stable or regular and do not constitute regular income for § 101(30) purposes.); In re Spurlin, 350 B.R. 716, 720, 721–22 (Bankr. W.D. La. Aug. 25, 2006) (Hunter) (Debtor not eligible to convert from Chapter 7 to Chapter 13 because debtor does not have regular income. Debtor was an “independent contractor” brokering the sale of “medium term notes . . . standby letters of credit or bank guarantees, you know, . . . oil and gas deals. . . . I help to broker, bring, just bring companies together.” Debtor admitted that he had no broker’s license, that he had no deals in the works and that his prior employer was in a Chapter 7 case. Although “[t]he regular income test is not a difficult one to pass, . . . these debtors . . . do not allege any source of regular income.”).


3  173 B.R. 943 (Bankr. E.D. Okla. Oct. 25, 1994) (Cornish).


4  See § 13.1  Debtor Must Be Able to Make Payments under a Plan and § 111.1  Able to Make Payments and Comply with Plan.


5  See In re Gestring, 91 B.R. 870 (Bankr. E.D. Mo. Oct. 20, 1988) (Barta) (Debtor’s intent to start a business at which she has no previous experience is insufficient.); Mills v. Gellert, 55 B.R. 970 (Bankr. D.N.H. Dec. 30, 1985) (Yacos) (Debtor may not be eligible for Chapter 13 where plan proposes entirely new business venture of developing residential property.).


6  See 11 U.S.C. § 1304(b).


7  See § 45.1  Debtor Has Exclusive Possession and Control of Estate Property and § 52.1  Operating a Chapter 13 Debtor Engaged in Business.


8  Pub. L. No. 109-8, 119 Stat. 23 (2005).


9  See § 92.1  In General, § 92.3  Current Monthly Income: The Baseline and § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).


10  See 11 U.S.C. § 1325(b)(4), discussed in § 100.1  Applicable Commitment Period Calculation.


11  See § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3) and § 100.1  Applicable Commitment Period Calculation.


12  11 U.S.C. § 101(10A), discussed in § 92.3  Current Monthly Income: The Baseline.


13  See § 52.3  Debtors Engaged in Business after BAPCPA.


14  See § 52.3  Debtors Engaged in Business after BAPCPA.


15  See § 52.3  Debtors Engaged in Business after BAPCPA.