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Last month, a California-based adoption agency closed its doors after filing for Chapter 7 bankruptcy. Unfortunately for nearly 2,000 hopeful adoptive parents – many of whom had already sunk tens of thousands of dollars into the adoption process – the agency arguably failed to prepare its clients, instead surprising families with last-minute email notifications. Whether it is a corporation, an LLC, or other type of business entity, every company should take steps to avoid this situation by preparing for Chapter 7 and subsequent closure well in advance of filing. In order to help companies prepare for Chapter 7, our Roseville Chapter 7 bankruptcy lawyers have compiled a short business bankruptcy checklist for closing a business in California.

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Types of Business Bankruptcy in CA

The vast majority of bankruptcies in California fall into one of the following categories:

  1. Chapter 7 (Liquidation)
  2. Chapter 11 (Reorganization)
  3. Chapter 13 (Reorganization, Wage Earner’s Plan)

Business entities may not file for bankruptcy under Chapter 13, which is prohibited by 11 U.S. Code § 109(e). It is only possible to file Chapter 13 bankruptcy in California if you are filing as an individual, or filing jointly with your spouse. However, with assistance from a Roseville Chapter 13 attorney, sole proprietors may wish to utilize Chapter 13 in certain situations. C corporations, S corporations, limited liability companies, and other California business entities essentially have two filing options under federal law: file under Chapter 7, or file under Chapter 11.

Though both forms of bankruptcy may be utilized by businesses, they involve drastically different criteria and procedures – and likewise, result in drastically different outcomes. While the full explanation is more nuanced, the short explanation is that Chapter 7 is a liquidation in which a trustee sells the company’s assets and the business typically closes. Chapter 11 costs more and takes a longer time to complete, but allows the company to retain its assets and continue operating. Our Roseville Chapter 11 attorneys assist clients with both types of business bankruptcy, and are happy to answer your questions about either during a free consultation.

Chapter 7 Checklist for Businesses: Steps Before Closing

By making sure to take certain steps when filing for bankruptcy in California, you can spare your customers, your employees, and yourself avoidable headaches.

  • Hire a California bankruptcy lawyer. Bankruptcy is a complex procedure, particularly if you are filing under Chapter 11, that will have a long-lasting financial impact on your liability for both personal and business debts. It is in your best interests to consult with an attorney, who, in addition to handling your legal documentation and making sure you understand your rights and responsibilities as a debtor, will also work to ensure that your case is filed with strategic timing using the chapter best suited to your objectives.
  • Notify your employees. Your employees will need as much time as possible to prepare themselves for the loss of income and to seek a new job.
  • Collect accounts receivable. Try to collect as much of the money that is still owed to the company as possible. It’s a good idea to do this prior to announcing closure of the company, and in some cases, may be helpful to offer a small discount as a way of encouraging customers to pay right away. You can also raise money before closing your business by holding a going-out-of-business sale.
  • Notify your customers. Make sure your customers receive plenty of notice that the company will be going out of business. For example, you can issue a press release or contact local newspapers about publishing a statement. Even though the company will cease operations, it never hurts to leave a positive impression – especially because you may decide to open a new business later, after the case is closed. Make a good faith effort to wrap up any transactions or contractual obligations you’re committed to, and speak with an attorney immediately about how to handle refunds, project cancellations, and any other unfulfilled provisions of a contract.
  • Submit paperwork and tax returns. After you’ve sent the final payments out to your employees, you’ll be required to file various state and federal employment tax forms, in addition to your final tax return. An attorney can help you understand which forms need to be submitted to the IRS, and by which deadlines, in order for you to fulfill your financial obligations.

file for bankruptcy in california

CA Bankruptcy Lawyers in Roseville, Folsom, and Sacramento

The experienced California bankruptcy attorneys of The Bankruptcy Group provide an array of bankruptcy legal services for corporations, partnerships, LLCs, and sole proprietors, ranging from small family-owned businesses to large franchises with thousands of employees. If you are a business owner who is thinking about filing for Chapter 7, Chapter 11, or Chapter 13 in California, make sure you discuss your legal options with our bankruptcy lawyers before you initiate the filing process. For a free legal consultation with The Bankruptcy Group, call our law offices at (800) 920-5351 today.