Unraveling What Chapter 11 Bankruptcy Means for a Business
Bankruptcy doesn’t necessarily mean a business is closing its doors. Usually when a business is filing Chapter 11, it’s looking for some breathing room to fix its balance sheet or overall finances. It will give them time to protect against their creditors while it attempts to regroup and re-emerge. The goal is to maximize asset value to repay as many creditors as possible.
Chapter 11 is the most common form of bankruptcy and allows a business to go through a reorganization of their affairs, debt and assets. Although the company might be choking on debt, there is an assumption the business can be salvaged so this is usually the first step and applicable to any size of business. Typically, it’s smaller businesses that are more likely to go out of business and would file a Chapter 7 bankruptcy.
During COVID-19, Neiman Marcus, J. Crew, J.C. Penney and Pier One have filed for Chapter 11 bankruptcy. Just last week, Hertz Rental Car and Tuesday Morning joined the list. In some instances, the lenders become owners of the company to lower their debt loads and it is also a way to protect the business from other creditors. With so much uncertainty during the pandemic, it will take several months to evaluate and come up with restructuring plans.
There’s nothing that prevents a company from filing for Chapter 11 and in the bankruptcy law profession there’s a term of “Chapter 22” for those that have the distinction of having filed twice. If a company tries to make a go of it by filing Chapter 11 and is unsuccessful, then you will see them liquidate at a later date. Typically, this is because of more fundamental issues than simply debt restructuring.
Sometimes you still see a brand live on beyond a bankruptcy even if the original operating company doesn’t exist because the brand name might still carry value. An example of this is Sax Fifth Avenue now owning the brand of Barneys of New York, which you’ll find in their stores. Another example is The Sharper Image, who no longer has brick and mortar stores but the private equity group who bought them, relaunched their products online and you can find them at Target and Bed, Bath & Beyond.
So, despite seeing the headline of another company filing for bankruptcy, it doesn’t necessarily mean they are closing their doors. But if by chance you do have a gift card with the store, it may be wise to use it quickly as it’s uncertain to know exactly how things may unfold.
Written By Heidi M. Johnson Bixby, CFP®