With California's economy facing headwinds from inflation, rising interest rates, and a sluggish real estate sector, more business owners are exploring bankruptcy as a strategic option—not a last resort. Understanding the legal tools available early can mean the difference between a successful reorganization and an irreversible collapse.
We spoke with Tracy Green, Director of Financial Restructuring at Fennemore in Oakland, for an in-depth look at bankruptcy trends, legal nuances, and how companies can proactively protect their future.
Bankruptcy Trends: What's Different in 2025?
“Bankruptcies happen in all economic climates,” Green notes, “but certain industries are feeling the pressure more than others right now.”
Take California's wine industry—home to over 4,000 wineries. Changing consumer habits, declining wine consumption, and increasing preferences for hard liquor or cider are deeply affecting vineyards, distributors, and related businesses. Retail and manufacturing are also being squeezed by higher costs and reduced consumer demand, while commercial real estate—especially office buildings and hotels—is suffering from decreased occupancy and value depreciation.
“Some companies are literally handing buildings back to lenders,” Green explains, “and many retailers are being forced to scale back operations.”
Types of Business Bankruptcies
In California, companies primarily file under Chapter 11or Chapter 7 of the U.S. Bankruptcy Code.
- Chapter 11 allows a business to reorganize while continuing operations. This option is often chosen to preserve jobs, sell the business as a going concern, or restructure while principals remain liable on personal guarantees.
- Chapter 7 is the path of liquidation, used when a company must shut down entirely.
A key feature of both filings is the automatic stay, which halts lawsuits, collections, and foreclosures immediately. “This stay is critical,” says Green. “It gives breathing room while the business charts a way forward.”
The Importance of Early Legal Consultation
Green is clear on one point: Don't wait until you're out of cash to consult legal counsel.
“One year in advance is not too early,” she stresses. “Bankruptcy counsel can help avoid filing altogether or structure the company for a better outcome if filing becomes necessary.”
Triggers like pending litigation, loan defaults, balloon notes, or cash-flow crunches may all signal the need for a professional assessment. And importantly, some preparatory steps—such as planning asset protection or evaluating contracts—must happen before creditors gain leverage through court judgments.
Is Bankruptcy the Right Move?
Bankruptcy isn't a failure—sometimes it's a strategic restart.
“If the business has something to reorganize—customers, cash flow, or assets—it might be worth filing,” says Green. “Especially if it helps scale back, terminate leases, or sell assets cleanly.”
She notes that Subchapter V of Chapter 11 offers a more streamlined, cost-effective process for qualifying small businesses.
Bankruptcy can also be a powerful tool for managing litigation or settling complex claims. “If you're in mass or multidistrict litigation, bankruptcy consolidates everything and gives you space to negotiate.”
Risks of Waiting Too Long
If there's one theme that echoes throughout Green's advice, it's this: Timing is everything.
“If a company calls me and they're already out of money, it may be too late,” she cautions. “Bankruptcy won't magically produce cash. You need funding to operate during and after the filing.”
Delays can also allow creditors to obtain judgments, place liens on assets, or collect payments that could be clawed back later—further complicating an already tough situation.
California-Specific Considerations
While bankruptcy is governed by federal law, each court interprets the code slightly differently. In California, courts follow the Ninth Circuit's precedents, which may diverge from rulings in other jurisdictions.
“For most businesses, these differences won't materially impact the case,” Green explains, “but for high-stakes filings, local expertise can be crucial.”
Protecting Business Owners Personally
Business owners often sign personal guarantees on leases, loans, or credit lines. If the company fails, their personal assets may be at risk.
“If you think the business is failing, you need your own counsel,” Green advises. “You might need to file for personal bankruptcy too, especially if guarantees are enforced.”
She also warns about insider payments—such as distributions to owners—which may be clawed back during a bankruptcy. Receiving a salary, rather than profit distributions, can reduce personal exposure.
What Does a “Successful” Reorganization Look Like?
In short: The business survives.
“A good outcome means the company reorganizes, employees keep their jobs, and creditors recover more than they would through liquidation,” says Green.
Even creditors should understand the tradeoffs. “Hope for the best, but plan for the worst,” she advises. In some cases, creditors who were paid before the filing may be required to return funds as preferences.
Preparing Financially: What You'll Need
Before considering a filing, companies should gather key financial and legal documents, including:
- Updated balance sheets, P&Ls, and cash flow statements
- All filed (or near-filed) tax returns
- A clear understanding of monthly burn rate
- Projections for shutdown costs, including employee PTO
- Timeline of upcoming debt obligations
“Know how much runway you have before needing a loan or refinancing,” Green says. “That clarity is essential for strategic decision-making.”
Conclusion: Use Bankruptcy as a Tool, Not a Lifeline
Bankruptcy should never be a surprise move—it should be part of a broader strategy. When handled proactively, it can give a business a second chance, protect ownership, and preserve long-term value.
For California business owners navigating economic uncertainty, early legal guidance is the single most effective step you can take.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.