blog posts

• Retailers continue to file for bankruptcy as a result of COVID-19, but what exactly does that mean? Lawless unpacks the basics for GQ Magazine.

  May 27, 2020 2:00 pmFaculty
  • Share on Facebook
  • Tweet
  • Email

  As more retailers file for bankruptcy amidst the COVID-19 pandemic, consumers naturally have questions about what exactly that means for some of their favorite brands. In a recent GQ Magazine article covering the basics of bankruptcy, Professor Bob Lawless was one of the featured subject matter experts who provided some answers. An excerpt from the article follows: 

  Why now? A company like J.Crew was already operating with $1.65 billion in debt.
  “Usually you see a company end up in Chapter 11 when they run out of cash,” says Lawless. Presumably, these companies tapped into every resource and weren’t able to make enough cash to remain operational. That’s when you turn the page and—bang—Chapter 11.

  Explain what happens next using 12 words or less.
  The company will create a plan to save or sell its business.

  OK, a few more words than that.
  Using J.Crew as an example, the company and the law firm it’s partnered with will put together a reorganization plan intended to get the company back to profitability—and that makes it possible for lenders to get paid back fairly. The plan is presented in bankruptcy court. “The debtor, or whoever's proposing the plan, has to put on evidence to prove feasibility,” says Rapoport. “You put on experts, they testify, someone can cross examine them, and then the goal is to figure out a plan so they won’t be back [in bankruptcy].”

   

  If a plan for reorganization can’t be agreed upon, the company moves into a sale. Forever 21 went through this, and was eventually bought up by Simon Property Group, the largest owner of shopping malls in the U.S. Lawless says that while a generation ago, reorganizations were common, asset sales are now much more standard. The money made from these sales goes directly into the pockets of the creditors these companies owe.

  The third way this goes down is the company enters bankruptcy with a “pre-packaged plan.” “If you want to be really cool, the cool kids in the bankruptcy lawyers’ offices call it a pre-pack,” says Lawless. We’re cool, right? Right. This pre-pack includes formal agreements for moving forward with its lenders in the initial bankruptcy filing. Typically, this means a company can exit Chapter 11 relatively quickly—several months is quick in the bankruptcy world. Otherwise, cases can drag on for years. J.Crew filed a “prearranged” Chapter 11, which is a much looser agreement with its creditors—and not at all guaranteed to ensure swift and steady proceedings.

  Read the full article at gq.com. 

  stats

  additional actions
  • Share on Facebook
  • Tweet
  • Email