Bankruptcy in Retail Stores: How the Process Works

Retail stores have been struggling since the advent of TV shopping networks and online shopping. Now, with most retail businesses closed down for weeks due to COVID-19, the situation may have become really dire. Many retail businesses may be considering bankruptcy. This post explores the bankruptcy process for retail stores, and complications that may arise because of the pandemic.

Different Types of Bankruptcy

Most businesses choose to file Chapter 11 bankruptcy rather than Chapter 7. Chapter 7 is a straight forward liquidation proceeding where all assets are sold off and creditors paid as much as possible from those funds. The court appoints a trustee who conducts the liquidation. Chapter 11 bankruptcy is a reorganization of the business that allows it to continue to trade in the marketplace while repaying creditors. Generally, the business itself proposes the reorganization plan. It is also possible to file for Chapter 11 bankruptcy more than once, without an onerous waiting period. This is informally called Chapter 22 bankruptcy. We will concentrate on the Chapter 11 process here.

Typical Court Process

When a retail business is considering bankruptcy, the obvious first step is consultation with expert attorneys. The professionals at Burr Law have years of experience dealing with bankruptcy and can guide you through the complexities of the process. When you file for Chapter 11 relief in bankruptcy court, no trustee is appointed. Instead, you become the Debtor in Possession (DIP). You have the exclusive right to propose a reorganization plan for at least 4 months and up to 18 months. Once you do so, your creditors need to agree to the plan, and the court needs to approve it. That is called confirmation and in doing so, the court will decide whether the plan demonstrates 4 factors: feasibility, good faith, best interests of the creditors, and fairness. The whole thing usually takes between 6 months to 2 years.

Typical Business Process

Because you are the DIP, you continue to run your business. With expert advice, you can decide what product lines to discontinue, what marketing strategies to change, and whether some stores need to close. The bankruptcy court must approve any sale of assets, lease agreements, and financing arrangements (mortgages or other secured financing). Usually, it takes 4 months to plan and run a going-out-of-business sale, so there’s a lot of analysis and decision making that needs to happen in a short amount of time. The key, though, is that you get to make those decisions, not the bankruptcy court.

COVID Complications

The aftermath of this pandemic creates unique difficulties for both the court and the business parts of the bankruptcy procedure. Experts anticipate that the numbers of bankruptcy will rise significantly, both personal and business. That means that the bankruptcy court will be flooded with cases, and delays due to packed court schedules may result. Bankruptcy judges may feel pressured to rush through cases, causing precipitous decisions detrimental to those involved. On the business side, with many states still imposing retail store closures, going-out-of-business sales simply cannot happen. And the kind of predictive analysis required to decide about customer traffic and buying behavior will be extremely difficult.

Best Advice: File Now

As a retail business in financial trouble, it may be wisest to file now. You may be able to avoid the overcrowded bankruptcy court schedule, or be at the top of the list. And with the Wisconsin Supreme Court decision, stores are able to open and hold those important going-out-of-business sales, except for some local restrictions. The bankruptcy experts at Burr Law can help you navigate the process.