Small Business Bankruptcy Attorney
in Los Angeles & Orange County, California

The pandemic and its resulting restrictions and lockdowns have left many small businesses struggling to survive. Government aid during the worst parts of the pandemic may have provided temporary relief, but the spending and shopping patterns of consumers have been changed by the ordeal.

Except for supermarkets and the big chains, many stores are struggling to attract customers, who are still exercising caution to prevent exposure to the virus.

For some of these businesses, bankruptcy may be the best option if they want to survive. For others, it may be the last resort to get rid of overwhelming debt while shutting down operations. Either option presents an avenue to a fresh start financially. Even Walt Disney had to declare bankruptcy before going on to create one of the world’s largest entertainment conglomerates.

If your business in Southern California is overrun with debt and you want a legitimate way out, then bankruptcy under Chapter 11, 13, or 7 may be just the option you’re seeking. To better assess your situation and discuss your options, contact The Orantes Law Firm. We proudly serve clients throughout Los Angeles, Irvine, Woodland Hills, Orange County, and Los Angeles County.

STEP ONE: WHAT TYPE OF BUSINESS DO YOU HAVE?

While Chapter 7 (liquidation of assets) and Chapter 11 (debtor-in-possession) are available to any type of business – sole proprietorship, Limited Liability Company (LLC), partnership, or corporation – Chapter 13 is open only to sole proprietors.

A corporation or LLC, since both shield the owners from personal liability, may not even need to file bankruptcy unless one or more of the owners has personally guaranteed a loan. If there are personal guarantees, then those owners can file individual bankruptcy to shed liability. Otherwise, with no personal guarantees, a corporation or LLC can simply shut down and let the creditors put the business into collection.

That leaves partnerships and sole proprietorships. In a partnership, if one partner declares bankruptcy, the enterprise may be forced to shut down because partnership agreements often contain a clause that dissolves the partnership if one partner files. This is to protect creditors from coming after the remaining partners, who may have more assets.

If you want to keep operating an LLC, partnership, or corporation, then Chapter 11 is the only option. A sole proprietor may have to resort to Chapter 11 if his or her unsecured debt load exceeds $419,275 or secured debt tops $1,257,850.

Under a sole proprietorship, the owner is personally liable for every debt, so every form of bankruptcy is available (Chapters 7, 11, and 13). However, you cannot file under your business name in Chapter 13. You must file as an individual with debts in your name from the business.

STEP TWO: WHICH CHAPTER SHOULD YOU CHOOSE?

A Chapter 7 filing is, simply put, a liquidation plan. All non-exempt assets will be sold by the bankruptcy trustee to pay off creditors to the best extent possible. Exempt assets in California include a primary residence (depending on the equity in it), a car up to a certain value, household items, pensions and qualified retirement plans, tools of the trade, and more.

Note that business assets, unless they fall under “tools of the trade,” will likely not be exempt.

A Chapter 13 filing, available only to sole proprietors and individuals with a monthly income, is a reorganization/repayment plan. Generally, you get to keep everything so long as you continue to pay for them. Secured items, like your home and vehicle, must be paid at the set monthly rate. However, if you are behind on the payments for them, you can include the arrears amount in your reorganization/repayment plan, but then will have to make the full payments each month.

As for unsecured debts, these also will be included in your repayment plan. Basically, you and your bankruptcy attorney will determine your disposable income – what’s leftover from your monthly income after living expenses – and pay that to the trustee each month for three or five years, depending on a variety of factors, including debt and income level.

Note, however, that if you lose your business and your income from it (you have no income), you cannot use Chapter 13 or Chapter 11.

Chapter 11 is similar to Chapter 13, but it is usually reserved for those with debts above the Chapter 13 limit and for those who don’t qualify for Chapter 13 because of business structure.

Unlike Chapter 13, however, Chapter 11 allows you to create and manage your repayment plan on your own as a “debtor in possession.” Being a debtor in possession allows you to continue operating your business. A bankruptcy trustee will generally not supervise your plan.

There is no set time frame as under Chapter 13, but you must create a plan that is approved by your creditors as part of a mandatory meeting under bankruptcy law. The creditors could reject your plan and force you into Chapter 7 after you present your proposal to them.

THE IMPORTANCE OF CHOOSING THE RIGHT TYPE OF BANKRUPTCY

Whichever chapter of the bankruptcy code you choose, the process of filing and then navigating the court/trustee system is not easy. Even deciding on which chapter to utilize can be daunting. Each has its own pros and cons. A Chapter 7 can be over in months, but both Chapter 11 and 13 can drag on for years.