If you think bankruptcies are only limited to individuals and rarely happen to established businesses, you are mistaken. There is a mounting list of leading retailers going broke in the US.
Most of these established names seek bankruptcy protection under Chapter 11 bankruptcy. Chapter 11 is one of the different types of bankruptcies under the United States Bankruptcy Code. These bankruptcies differ in how often can you file bankruptcy.
The most apparent reasons for retailers seeking bankruptcy protection are the changing shopping habits of Americans as also the overly aggressive store growth. However, specific retail stores may have specific reasons for closing. Let's see three such stores:
#1 Toys R Us
Toys R Us filed for voluntary Chapter 11 bankruptcy protection, since it is under a whopping $4.9 billion debt. The interest payment of this debt, due in 2018 is $400 million and in 2019, $1.7 billion.
Aerosoles, the footwear maker formerly known as Aero, filed for bankruptcy and is planning to close most of its stores to focus on its e-commerce, wholesale and international businesses. This is because of declining mall traffic and shift towards online shopping.
This clothing company for the teens that has more than 1,100 stores, filed for Chapter 11 bankruptcy protection to reduce its debt and to infuse additional capital for restructuring. According to the court filing, the company listed its assets in the range of $1 billion and liabilities in the range of $10 billion.
There are many more such retailers that have filed or are planning to file for bankruptcy, even though a majority of them have not gone broke. So, why are they filing for bankruptcy?
Reasons for filing bankruptcy when not broke
Take the case of Rue21, it seemed a raging success in 2016, when it earned $54 million, but just a year afterwards, it abruptly filed for Chapter 11 bankruptcy, when it was not actually broke. This trend of filing for Chapter 11 bankruptcy reorganization while still profitable is a survival strategy that is being adopted by a number of retailers.
Such businesses, that look otherwise financially healthy, take preemptive action because they foresee the writing on the wall of the impending doom. Such companies, although making money on their actual operations, are unable to make their debt payments.
What is Chapter 11 bankruptcy?
Chapter 11 bankruptcy is one of the four different types of bankruptcies that come under the United States Bankruptcy Code. These bankruptcies cover both individuals and corporations.
While Chapter 7 bankruptcy is liquidation bankruptcy, where the trustee is authorized to sell off all non-exempt assets of the debtor to pay the creditors, Chapter 13 bankruptcy allows the debtor to retain control and ownership of assets. Chapter 12 bankruptcy is basically for farm owners.
Chapter 11 bankruptcy, on the other hand, is specifically meant for troubled businesses. It involves complex bankruptcy filing in which the debtor continues to function and retain ownership of all assets, while attempting to work out a reorganization plan to pay off the creditors.
However, this reorganization process has a time limit of 120 days, as enshrined in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Failure of debtor to submit the reorganization plan within the stipulated period allows the creditors to submit their own plans.
The aim of Chapter 11 bankruptcy is to create a reorganized company, that may be smaller than the original one, to give it a new start. And the statistics that show this are encouraging.
According to some studies, about 10 to 15 percent of Chapter 11 cases result in successful reorganizations. Most cases are either dismissed or converted to Chapter 7 liquidations by court's approval. The bankruptcy court can also dismiss a Chapter 11 case or convert it, if the debtor fails to show that it can successfully reorganize.
The spate of recent bankruptcies under Chapter 11 has brought the financial health of leading retailers in sharp focus. At least 19 famous retailers were forced to seek bankruptcy protection in 2017 and the situation continues to look as grim in 2018. Even seemingly financially healthy retailers are filing for bankruptcy to avoid creditors and to restructure their businesses to sync with the current retail scenario.