Construction industry spending reached an all-time high of $1.57 trillion in 2021, and opportunities abound for companies in both the private and public sectors. But payment problems are holding back contractors — as per Levelset’s 2022 Construction Cash Flow & Payment Report, just 12% of businesses report always getting paid on time and only 39% report getting paid in under 30 days on average. Payment issues like this can often lead directly to bankruptcy for companies, and California contractors haven’t been immune.
Eight contractors in the state filed for bankruptcy in April 2022, with all of them filing for Chapter 7 bankruptcy after many reported revenues of less than $500,000 in the past year.
Sadly, that pattern stuck around in May. Out of four contractors that filed for bankruptcy in California in May 2022, three are facing liquidation bankruptcy, and all four reported revenues less than $500,000, despite having liabilities that greatly outnumbered that.
Three of the four contractors filed for Chapter 7 bankruptcy:
- Decotal Construction & Remodeling, Inc. (May 5)
- Dirtmaster, Inc. (May 9)
- Paz Construction Co. (May 27)
Chapter 7 bankruptcy is often referred to as liquidation bankruptcy, as it doesn’t involve the filing of a plan of repayment like other chapters of the bankruptcy code allow for. Instead, the process provides for a debtor’s nonexempt assets to be sold, with the proceeds going towards paying off the debtor’s creditors. Certain property can be held as exempt, but Chapter 7 filings usually result in loss of most (or all) assets and property, as well as the closure of the business itself.
Rancho Palos Verdes’ Dirtmaster is probably in the most difficult position. Despite having less than $50,000 in assets, it lists between $1 million and $10 million in debts. Calexico’s Paz Construction is dealing with fewer debts — only between $50,000 and $100,000 — but similarly has less than $50,000 in assets.
Newbury Park-based Decotal Construction & Remodeling has allegedly run into some problems with customers prior to their bankruptcy filing, with one customer noting “It has been 4 years since I used Decotal and to this day I am still regretting my decision…I strongly recommend [potential customers] look elsewhere.” The company listed liabilities between $100,000 and $500,000, but less than $50,000 in assets.
Only one contractor filed for Chapter 11 bankruptcy, with Qualitat Drywall, LLC filing on May 27. The company is in a bit more of a financially advantageous situation than the previously mentioned contractors filing for Chapter 7 protection; the filing claimed assets between $100,00 and $500,000 and liabilities between $500,000 and $1 million.
Chapter 11 bankruptcy is frequently viewed as “reorganization” bankruptcy. Generally, it allows the debtor to remain in possession of its assets and to continue business operations while proposing a plan of reorganization in order to pay its debts (optimally without the significant loss of assets or property).
Learn more: How Bankruptcy Impacts a Construction Project