Bankruptcy isn’t just for broke companies
For some businesses, it’s a way to hit reset button
If you only looked at its profit statement, you might have thought teen- fashion retailer Rue 21 was a raging success. After all, it earned $ 54 million in 2016.
But instead of waiting to fall into serious red ink, Rue21 abruptly filed for bankruptcy in May. And it’s not alone.
Rue21 is part of the trend of retailers that are filing for Chapter 11 bankruptcy reorganization while still profitable. It’s a survival strategy that could play out during the next couple of months among retailers who fared poorly during the critical holiday season.
Several national chains survived their brush with death by filing for court protection from their creditors in 2017 even though they might have otherwise looked financially healthy. The trend illustrates the importance of pre- emptive action for retailers that foresee impending doom.
“If you see a retailer that is at least nominally in the black” that files for bankruptcy, it’s “almost always going to be because they have a balance sheet that no longer works for the company,” said Jude Gorman, an insolvency expert and general counsel of Reorg Research.
In other words, they’re making money on their actual operations, but they’re broke because they can’t make their debt payments.
Naturally, there’s a question of whether companies that are still in the black should be allowed to declare bankruptcy, which often hurts financial creditors, landlords, retirees and product suppliers.
Melissa Jacoby, a University of North Carolina bankruptcy law professor, said some companies “with no real financial problems” that have filed for bankruptcy seeking only to use the legal process as a “bludgeon” for creditors have had their cases thrown out of court.
But it’s more common for companies to wait too long to file for bankruptcy, Jacoby said.
“Itwould be a shame if people took away that filing earlier suggests any sort of abuse, when that is not necessarily the case,” she said.
Besides Rue21, national fashion brands Payless Shoe-Source and True Religion embraced bankruptcy in 2017 and made it out alive, albeit with fewer stores.
All three were turning a profit before taxes, interest and other special items shortly before they filed for bankruptcy.
Chapter 11 allows retailers to break leases on money- losing stores and slash loans — critical elements to reducing potential losses.
Rue21, for its part, announced it would close up to 400 of its 1,179 stores a month before its filing.