What Is Chapter 11 Bankruptcy?
With many recent mentions or actual filings of bankruptcy in the retail industry, I thought it would be good to share some information about what it really means. Being a part of one of those companies begins to open your eyes about many misconceptions and misunderstandings around what bankruptcy is and what it means.
Foremost, Chapter 11 bankruptcy does NOT mean that a company is going out of business. It is about reorganizing and restructuring debt that a company has accumulated over time to various lenders and creditors. The company generally remains in control of the organization, but does so with court oversight, ensuring fair processes for everyone involved. This type of bankruptcy can be a useful tool for businesses struggling with debt, as it allows them to restructure their finances in a way that makes it possible for them to continue operating.
Here is how Investopedia explains Chapter 11 Bankruptcy:
In a Chapter 11 bankruptcy, the company doesn't go out of business but is allowed to reorganize. A company filing Chapter 11 hopes to return to normal business operations and sound financial health in the future. This type of bankruptcy is generally filed by corporations that need time to restructure debt that has become unmanageable.
Chapter 11 allows the company a fresh start, but it must still fulfill its obligations under the reorganization plan. A Chapter 11 reorganization is the most complex and, generally, the most expensive of all bankruptcy proceedings. It is therefore undertaken only after a company has carefully considered all the alternatives.
Most companies, and this has been the case for many of the retailers that have entered into Chapter 11 recently, do so to restructure overwhelming debt loads. This can occur through many reasons, including previous investor choices and the cost of becoming a public company (i.e., taken public after being privately held). It can be based on a downturn in business, and a company’s need to borrow money to maintain operations, but it can no longer afford that debt due to ongoing sales shortfalls. Or it can be a combination of those and other factors in how the business was run (i.e., bad financial investment and decisions that drained company cash reserves).
Filing for Chapter 11 allows companies to not only restructure their debt, but also their contracts and agreements with other vendors. This will include merchandise vendors, landlords, and other support companies that retailers use as a normal course of business. The court protection allows the company to renegotiate the terms and conditions of the contract, or seek new ones that will allow for a successful continuation of business for the long term.
In 2020, just after the pandemic started, numerous retailers filed for bankruptcy due to the sudden change in the business landscape. Most retailers had stores that were closed for business for an extended period of time due to local and federal restrictions put in place for public safety. Many of those companies were able to reorganize and restructure successfully and continue in business today. Notably, JC Penney, Neiman Marcus, and Tailored Brands (parent of Jos A Bank and Mens Warehouse) all filed for Chapter 11 that year, and have emerged as successful businesses.
There are occasions when the restructure cannot be completed. There is no path forward, and no one willing to invest in the future of the company. That occurred for Pier One, which ended up closing all their stores in 2021. Toys R Us is another pre-pandemic business that had once thrived in the marketplace but after several business condition changes, and ownership changes, the company eventually failed. The remnants of that business were sold off as part of the Bankruptcy proceedings, and now has new roots with a different business model. Toys R Us has an international presence, an online presence, and recently has opened a store within a store concept inside many Macy’s locations across the US.
The real design of Chapter 11 filings is to give businesses another chance. Businesses with strong and viable models for success can utilize this process to reset their finances and structure and begin to build their business back. Most of the major airlines have filed for bankruptcy at least once. General Motors and Chrysler have successfully navigated through Chapter 11 and are doing well today. Bankruptcy is something that can provide new life and opportunities for business when handled correctly.
It can be an unnerving feeling when you see companies filing for bankruptcy in your industry. It is even more so when it is your company. But understanding the process is critical to seeing the full picture of what it might mean for you or others within the business, or industry. The more you know, the better you can navigate the right path for you and your personal decisions.
Other Resources:
Corporate Bankruptcy: An Overview
Bankruptcy Explained: Types and How It Works
Chapter 11 Bankruptcy: Understanding the Basics
6 Benefits OF Chapter 11 Bankruptcy for Business
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