While the American economy has questions as to whether improvement is coming, one thing is certain. Retailers that seek bankruptcy protection are more likely to fail than to businesses in other industries. The stories of failed businesses that go through bankruptcy are famous, troubling and unfortunately, predictable.
Whether it is Borders Books, Circuit City, Filene’s Basement or Radio Shack, once a retailer goes into Chapter 11 bankruptcy, its chances of emerging as a solid and profitable new company are slim. This post will highlight the reasons behind this new trend.
Rules changes – Prior to the overhaul of bankruptcy rules in 2005, retailers would be able to spend much more time in bankruptcy, where a company would have more flexibility in getting approval for a reorganization before they were pushed into liquidation. Now, businesses only have a matter of months to decide whether they will sell off assets or terminate leases to save money.
Administrative priority changes – Additionally, control over the a retailer’s goods obtained (or eventually sold) in the 20 days preceding a bankruptcy changes the way creditors view potential claims against a company seeking bankruptcy protection.
A growing liquidation market – More firms have emerged that will handle a retailer’s “going out of business” sale, and lenders are more likely to accept offers from liquidation companies for retailers’ goods. Liquidation companies are offering 100 percent (and sometimes additional amounts) of such goods, which makes it enticing for lenders to accept such offers.
Given the continuing retail climate, it would not be surprising if additional retailers seek bankruptcy protection. If you are a stakeholder or creditor it is helpful to have an experienced bankruptcy attorney to protect your interests.