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What does business bankruptcy look like? A brief case study.

by | Aug 23, 2021 | Corporate Bankruptcy & Restructuring

The term bankruptcy likely brings to mind pictures of closed, dusty, vacant buildings. Depending on the type of bankruptcy and the business’ owners goals the reality can be much different.

Retail giant JCPenney is set to provide an example of what a successfully bankruptcy can look like — a business that is restructuring, reorganizing, and positioned to come out of the process stronger than when it entered bankruptcy. JCPenney is set to exit its Chapter 11 bankruptcy before the end of the year. The company had to make some compromises to get to this spot. It basically broke into two parts, one an operating company that is composed primarily of the mall landlords. This portion is set to move forward without being a part of the Chapter 11 proceeding. The other portion of JCPenney is basically a property company, owned by the lenders.

Why file for bankruptcy?

When it comes to business bankruptcy, the main reason is that the business assets are not enough to pay off its debts. If granted, a petition for bankruptcy relief gives a pause on collection efforts so the business can reorganize its debts. In some cases, this can mean a more manageable repayment plan that allows the business to move forward with its operations. This is called a Chapter 11 bankruptcy.

JCPenney was struggling to deal with a marketplace that was focusing on specialty shops and online sales. Throw in the pandemic and their financial woes intensified and quickly became unmanageable. The leader of the business currently believes that JCPenney still has value and will be able to grow with its revised business plan in place.

Not every business is the best candidate for this type of bankruptcy. Others would do better with dissolution. This generally involves the court appointing a trustee to guide the sale of the business’ assets to pay off creditors and the court forgives any remaining debt. This is known as a Chapter 7 bankruptcy. Although this may not be ideal, if the business was incorporated wisely even this option can lead to a fresh start for the business owner to pursue other opportunities.

Is this common?

Using bankruptcy to restructure a business is not uncommon. JC Penney is just one example. Similar giants in the retail industry like Neiman Marcus and J. Crew have also taken a similar bankruptcy path towards a fresh financial start. Others have not fared as well. Those include Stein Mart and Pier 1, both of which had to shut down.

Figuring the right option for your business will depend on a variety of factors, including debt to capital ratio and your future plans. It is important to take all options into consideration to better ensure you make the decision that is best for your financial interests.