What to Know About Business Bankruptcy in California
And the alternatives to consider first
on June 30, 2022
Updated on August 4, 2022
Lillian Stenfeldt, partner at Rimon Law’s Silicon Valley office, considers bankruptcy a last resort. “There’s a lot you can do pre-bankruptcy,” she says.
First, have a backup plan—and a backup plan for the backup plan.
“I always urge companies to have an expert come in as soon as possible so they know what alternatives are out there so they can plan accordingly,” Stenfeldt says. “Even if they think their revenue is going to increase with, say, some big new marketing campaign, it’s always good to have a plan A, B and C.”
Alternatives to the Bankruptcy Process
For example, Stenfeldt says, a company might be tempted to file bankruptcy when there’s a downward revenue trend and they’ve exhausted all possibilities of cutting expenses, but that’s where Plan A comes in: Ask, ‘Is there a non-bankruptcy workout possible with the creditors?’
“If your rent jumps and you can’t find an alternative place to go, or if a creditor calls all the debt due and you don’t have the cash to pay it, a non-bankruptcy workout is just an agreement with that creditor or creditors on how to pay the money due or how to work it out so you can afford to make the payments without filing bankruptcy or filing for an ABC.”
An ABC—assignment for the benefits of creditors—is a state law alternative that mimics federal bankruptcy law. One of the benefits of this type of liquidation, Stenfeldt notes, is that it comes with “more confidentiality and privacy.”
Working With a Bankruptcy Attorney
If alternatives are exhausted and bankruptcy is on the table, Iain Macdonald of San Francisco’s Macdonald Fernandez says he works with his clients to help them understand the reality of the process.
“I always want to make sure the person understands what bankruptcy is and what the risks are,” Macdonald says. “There are a lot of nuances.”
Those nuances vary from chapter to chapter. Chapter 13 of the U.S. Bankruptcy Code is only for individuals. To file, the individual’s maximum debt cannot exceed $419,000 and their mortgage cannot be more than $1.25 million, says Macdonald, who adds that proposed legislation could change these numbers in the future.
Differences in Chapter 13 and Chapter 11 Bankruptcy
Macdonald notes that consumers who file Chapter 13 bankruptcy get additional time to cure the default on their mortgage and pay it off.
“In California when a foreclosure starts, the lender gives three months’ notice of default. Then after three months, they can go ahead and schedule the sale on 20 days’ notice and that’s it, it’s gone,” Macdonald says. “However, [the homeowner] can use a bankruptcy to stop the foreclosure and file a plan; in Chapter 13, that gives them up to five years to cure the defaults. So it’s a huge benefit to use Chapter 13 for that purpose.”
For businesses, Subchapter 5 of Chapter 11 can be used the way Chapter 13 would be used for an individual. Macdonald says the new subchapter went into effect in 2020 in hopes of making reorganization bankruptcies more accessible to small businesses.
“Subchapter 5 of Chapter 11 is for a business individual or business entity that [makes] up to $7.5 million, and it works like a Chapter 13, where relief can be had from foreclosures and other debt,” Macdonald says.
While bankruptcy code is federal, state laws do vary, says Macdonald. Retirement plans and benefits, homestead and automobile exemptions, and even contracts can all differ from state to state.
Regardless of what type of bankruptcy you’re considering, the advice is the same: Bring in an expert early.
“When I work with financially challenged companies and they come to me early enough, we can often avoid bankruptcy,” Stenfeldt says. “You save hundreds of jobs and you keep a company in business that offers a service to the community. It’s very satisfying when you’re called early and can work together to come up with creative solutions.”