Business bankruptcy

Consider Chapter 7 Business Bankruptcy in California

Whether you’re a sole proprietor looking for a fresh start or the owner of a corporation or LLC that can no longer keep up with mounting debt, we at the Law Offices of Adele Schneidereit help California business owners find the right path to debt relief through bankruptcy.

Running a business is hard enough without the relentless interruptions of creditors, lawsuits, and collection calls. With offices on the Central Coast in Atascadero, near San Jose in Santa Cruz County, and in Rialto near Los Angeles, we help business owners understand their options and choose the form of relief that fits their goals, for the business and for themselves.

• Stop lawsuits and collection actions
• Stop levies on business accounts
• Close a struggling business

How do the different types of business bankruptcy work?

How your business is structured determines who files, which chapter applies, and what happens to the debts. You can trust our attorneys to guide you through the process for:

• Chapter 7 bankruptcy for sole proprietors: Eliminates most business and personal debts in a single personal bankruptcy while protecting certain “tools of the trade.”
• Chapter 7 bankruptcy for corporations and LLCs: Provides an orderly way to close a business that can’t continue. Debt isn’t eliminated, but the automatic stay extends into perpetuity, protecting the business from creditors’ collection efforts.
• Chapter 13 bankruptcy for sole proprietors: Lets you keep operating while you repay debts through a court-approved plan.

Will bankruptcy eliminate my business’s debts?

It depends on how your business is structured. For a sole proprietor, business debts are eliminated in a personal bankruptcy. For a corporation or LLC, debt isn’t eliminated in a Chapter 7, but the automatic stay extends into perpetuity, protecting the business from creditors’ collection efforts.

How does bankruptcy work for a sole proprietorship?

Legally, there is no difference between a sole proprietor’s personal debts and the business’s debts. A sole proprietorship is not a separate legal entity, so if you never formed a corporation or LLC, the business’s debts are your personal debts, and a creditor can pursue your home, car, or bank accounts to collect. Those business debts are discharged in a personal bankruptcy along with your other debts.

Can I keep running my business if I file Chapter 7 as a sole proprietor?

Often, yes, especially if you run a service-based business with few assets. Business assets such as equipment, inventory, and accounts receivable become part of your bankruptcy estate. California exemptions, including the tools-of-the-trade exemption, may protect some or all of them, but the trustee can sell assets that aren’t exempt. We review your business assets before filing so you know what you can keep.

Do I have to pass the means test if most of my debt is business debt?

No. The Chapter 7 means test under 11 U.S.C. § 707(b) applies only when your debts are primarily consumer debts, meaning debts incurred for personal, family, or household purposes. If more than half of your total debt is business debt, the means test does not apply. Secured debts, such as liens, count toward that total. This means a sole proprietor whose income is above the California median for their household size may still qualify for Chapter 7 when most of the debt comes from the business. A mortgage on your home is generally treated as consumer debt, so we review each of your debts to determine how they’re classified before recommending a chapter.

Can a corporation or LLC file for bankruptcy in California?

Yes. Corporations and LLCs can file a Chapter 7 bankruptcy in their own name. Because they are separate legal entities, they file separately from their owners.

What happens to a corporation’s or LLC’s debts in Chapter 7?

In Chapter 7, a corporation’s or LLC’s debts are not restructured or eliminated, and the business does not receive a discharge. Instead, the automatic stay protects the business from creditors’ collection efforts and extends into perpetuity unless a creditor persuades the court to lift it. In our experience, creditors have not succeeded in lifting the stay.

Is there a debt limit for Chapter 13?

Yes. Under 11 U.S.C. § 109(e), Chapter 13 is available only if your secured and unsecured debts are below limits that are adjusted periodically. Sole proprietors with significant business debt can exceed these limits. We check your debts against the current limits before recommending a chapter.

Am I personally liable if I guaranteed my business’s debts?

Usually, yes. A business bankruptcy doesn’t eliminate personal guarantees on business loans, leases, or credit lines. If you signed a guarantee, the right plan may involve both the business and you as the owner.

Can personally guaranteed business debt help me qualify for Chapter 7?

It can. Debts you guaranteed for your business are generally treated as business debts, not consumer debts. If they make up more than half of your total debt, the means test does not apply to your personal Chapter 7, even if your income is above the California median.

Am I personally liable for my business’s unpaid payroll or sales taxes?

You may be, even if your business is a corporation or LLC. Payroll taxes withheld from employees’ wages and sales tax collected from customers are “trust fund” taxes. The IRS, the California Employment Development Department (EDD), and the California Department of Tax and Fee Administration (CDTFA) can hold owners and other responsible people personally liable for them. These taxes generally can’t be discharged in a personal bankruptcy, so we help you plan for them before you file.

What happens to unpaid employee wages and business leases?

Employee wages earned shortly before filing receive priority, which means they’re paid ahead of most other unsecured debts if funds are available. Commercial leases and equipment leases can be rejected in bankruptcy, which ends your obligation to keep paying them going forward. The landlord or leasing company may then file a claim for damages, which bankruptcy law limits.

Can the trustee take back payments my business made before filing?

Yes. The trustee can recover certain payments made to creditors within 90 days before filing, and payments made to insiders, such as owners and relatives, within one year. The trustee can also undo transfers of property made for less than fair value, going back two years under federal law and longer under California law. Talk to us before paying back family members, transferring assets, or moving money out of the business.

What should I bring to my consultation?

Bring as much of the following as you can:

• Business and personal tax returns for the last two years
• Recent profit-and-loss statements and bank statements
• A list of creditors and the amounts owed
• Loan documents, leases, and any personal guarantees you signed
• Any lawsuits, judgments, or collection notices

Why choose the Law Offices of Adele Schneidereit for business bankruptcy?

Business bankruptcy involves more moving parts than a personal case: employees, vendors, leases, taxes, and guarantees all need to be considered together. A single mistake can lead to delays, dismissal, or lost assets. We take the time to understand your business and build a strategy around your goals, so you and your business can move forward.

How do I get the fresh start my business needs?

Filing for business bankruptcy is not an easy decision, but it could be the right one for you. Our experienced attorneys can help you explore your options and make the best decision for your future. Schedule a complimentary consultation today.