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Business bankruptcy: common causes, and how Chapter 11 filing can help address them

Success in the retail industry is not easy to achieve, and can easily be lost. A recent article highlighted the recent cluster of bankruptcy filings in the retail industry, especially the retail sporting goods industry, highlighting some of the common causes leading up to bankruptcy.

Among the common causes of bankruptcy among retail companies are: failure to adapt, particularly to the growing trend in online retail; over-expansion of real estate ownership; failing to update business concepts to meet consumers where they are at; and failure to successfully negotiate mergers and acquisitions. Chapter 11 bankruptcy, while not an ideal way to address these issues, can certainly provide businesses the opportunity and motivation to do so. 

Similar to how Chapter 7 bankruptcy provides debtors with a "fresh start" and Chapter 13 is Chapter 11 bankruptcy is often referred to as a "wage earner's plan", Chapter 11 is known as a "reorganization" form of bankruptcy. Chapter 11 is most commonly used to reorganize a business, whether a corporation, partnership or sole proprietorship.

As part of the Chapter 11 bankruptcy process, businesses must file a written disclosure statement and a plan of reorganization. A disclosure statement includes information about the business' assets, liabilities, and other matters--enough information to allow creditors to make informed judgments about the debtor's reorganization plan. In a Chapter 11 case, the debtor has the exclusive right to file a reorganization plan within a certain period of time, ordinarily 120 days. After that time has expired, creditors may file a competing reorganization plan.

Once a plan is confirmed, the business debtor is required to make payments according to the plan and must abide by the terms of the reorganization. These plans establish contractual obligations which replace any contracts which existing prior to the bankruptcy filing.

In our next post, we'll continue looking at this topic.

Source: United States Courts, Chapter 11 Bankruptcy Basics, Accessed Sept. 19, 2016.

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