When a business finds itself in dire financial straits, there are several different options to address insolvency, which is essentially the company’s inability to pay its debts. Here, we’ll take a look at two different approaches companies may take when filing bankruptcy, depending on whether they want to try to save the business by pivoting in a new direction or would rather pay off as much debt as possible before exiting.
Liquidation: An overview
As part of a Chapter 7 liquidation, a bankruptcy trustee will be appointed to seize a company’s assets and sell them to pay off creditors. The business ceases operations, and the trustee is given the right to take anything the business owns and put it toward outstanding debt.
Toys R Us, for example, had liquidation sales prior to going out of business in 2017 in order to raise enough funds to pay creditors at least some of the debt that was owed. Payless, for the second time in two years, filed bankruptcy at the end of February, with plans to liquidate all of its merchandise by the end of the month.
With its first bankruptcy filing, Payless originally attempted a reorganization but had too much debt, too many stores, and according to the company’s chief restructuring officer, was not prepared to continue operating its business under today’s business environment, which is more focused on e-commerce. Toys R Us, on the other hand, despite liquidation, continued to operate pop-ups under the name Geoffrey’s Toy Box, named after the company’s giraffe mascot, and has reopened as Tru Kids, a move that will allow the company to retain its trademarks.
Reorganization: Rejuvenate your business model
Reorganization is a move that allows a company filing Chapter 11 bankruptcy to restructure its debt without going out of business. The company retains its assets and continues to operate its business while renegotiating the terms of its financial obligations. Reorganization bankruptcies are more complicated than liquidation, and courts generally limit the amount of time a company has to restructure its debts. During the reorganization period, the business is protected from creditors.
Eastman Kodak had a history of more than 100 years as one of the leaders in photographic film until digital photography did to film what CDs did to albums, and Kodak film became nearly obsolete. Kodak, however, fought back, and after filing Chapter 11 in 2012, spent nearly two years on a massive business reorganization followed by a rebranding that allowed the company to take advantage of technological advancements and remain viable, albeit without the same profit levels as it had during its heyday.
A company may also opt to reorganize by consolidating debts and adjusting loan agreements without officially filing bankruptcy, if lenders are agreeable.
Are you considering business bankruptcy?
If your business is going through a difficult time financially, a bankruptcy attorney can help you decide whether liquidation or reorganization is the right move for your company. Talking with experienced legal counsel can give you a better idea about your options and help you determine which one is the right one to choose going forward. The attorneys at Hedtke Law Group understand what your business means to you and your financial future and can help you make an informed decision that may help you save your company and give you a fresh start. For more information or for a free consultation, please call us at 626.502.8405 today.