A business must make money in order to survive, and going bankrupt is every businessman’s worst nightmare. Most people relate the term bankruptcy by running out of money…but that does not tell the full story. Let’s dive deeper into what actually happens when a company declares bankruptcy.
Different Types of Bankruptcy
There are three primary types of bankruptcy in which large companies can declare, with the two most common being Chapter 7 and Chapter 11 bankruptcy. Initially, a business may use a Chapter 11 bankruptcy declaration to attempt and reorganize its business model and return to profitability. The business continues its day-to-day operations, but all future important business decisions must be approved by a bankruptcy court.
Chapter 7 bankruptcy is a more official surrendering than Chapter 11. When a company declares Chapter 7 bankruptcy, all operations are ceased and the business is retired. The company’s assets are then liquidated, or sold, by an appointed trustee.
The third most common type of bankruptcy is Chapter 13, which involves an approved re-payment plan where the company strategizes how to repay their debts over a 3-5 year period. Chapter 13 bankruptcy offers an advantage over the similar Chapter 7 bankruptcy, as it allows the company to keep some of their assets as they develop a plan to pay back their debts.
There has recently been a surge of large retail chains being forced into bankruptcy due to the emergence of e-commerce hurting their bottom line. The former fast-fashion giant, Forever 21, was forced to file for Chapter 11 Bankruptcy on September 29th of this year. The famous brand had sunk into debt after losing market share to competitors H&M, Zara, and e-commerce clothing companies. Forever 21 announced they are currently closing an expected 350 stores worldwide. The Chapter 11 filing postpones the company’s obligations to its creditors and gives them time to reorganize their debts and sell parts of the business. A Forever 21 spokesman recently stated, “This does not mean that we are going out of business – on the contrary, filing for bankruptcy protection is a deliberate and decisive step to put us on a successful track for the future.” So, filing for bankruptcy does always mean a company is going under and in this case, Forever 21 stores continued their day-to-day operations as executives strategized which locations to close down.
One notable bankruptcy case that we have discussed before is that of Toys R Us. In the late 20th century they boasted dominant sales numbers and market share in the toy industry, but rapidly declined with the birth of e-commerce. In September of 2017, Toys R Us filed for Chapter 11 bankruptcy after amassing over $5 billion in debt. After attempted restructuring, the company announced that all US locations, which accounted for the vast majority of stores, would be completely liquidated. After a few weeks, they were approved to begin liquidation by the Bankruptcy court. Once liquidation began, the company sold off its store locations, as well as intellectual property, to help pay off its debts. In January of this year, Toys R Us emerged from bankruptcy as Tru Kids. The rebranded company plans to open up smaller-sized retail stores and has partnered with Target to launch an online shopping site.
As you can see, when a company files for bankruptcy, they are not going out of business just yet. In the case of Toys R Us, who most thought was dead in the sand; they were able to liquidate most of their assets and rebrand themselves to get back in business just a couple of years later. Companies that are faced with bankruptcy have ample opportunity to dig themselves out through effective restructuring and cost-cutting.