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Why Big Businesses Are Filing Bankruptcy

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Why Big Businesses Are Filing Bankruptcy

It is crucial to stay on top of technology and ahead of your competition.  When Amazon and e-readers came about, Barnes & Noble increased its online inventory and launched the Nook.  However, its competitor Borders did neither.  Ultimately, Borders filed for chapter 11 bankruptcy.

Similarly, when Netflix introduced the idea of renting movies online and mailing them back in, eliminating those atrocious late rental fees, Blockbuster did nothing.  In fact, they did nothing for a while.  I was a Netflix member for a little over a year, and I joined quite late, before Blockbuster introduced its online movie rental system. By then, no one wanted to learn about Blockbuster’s new system because everyone was hooked on Netflix.  Ultimately, Blockbuster too filed for chapter 11 bankruptcy.

When a corporation files for Chapter 11, the aim is to restructure the business so that it can remain in business.  When a corporation files for Chapter 11 in Federal Bankruptcy Court, an automatic stay comes into play.  This ensures the corporation (the debtor) that the creditors will not come after the corporation for money owed to them.  In other words, the corporation gets some breathing space and is saved from any litigation while it plans to reorganize and pay off its debts.

The corporation then has many options to restructure.  Usually, with the aid of attorneys, corporations create a reorganization plan to restructure the business so that it can bring in revenue, pay off its creditors, and continue to operate.  The plan usually entails negotiating favorable leases, finding new lenders and/or negotiating further funding from current creditors.  The court hears from the creditors and the corporation, and ultimately decides if the corporation’s plan of reorganization complies with bankruptcy law and provides adequate protection to the creditors.  The corporation aims to convince the court that the reorganization plan is viable, and that the creditors will receive payment within a reasonable time period.

Currently, Borders is making a reorganization plan to help restructure the business to boost revenues.  However, according to a recent article in the New York Times, a federal bankruptcy judge has approved the sale of Blockbuster. With this sale, the creditors would receive some of the money owed to them within a reasonable time period.  In time, Blockbuster will be able to pay off all its creditors.

The lesson to be learned from all of this is that in business, it is essential to update the business as technology progresses and competitors introduce new technology-savvy products.  Are these basics not common sense?  If so, why did large names such as Borders and Blockbuster not do so?  Some potential reasons could be finances, slow-planning, or poor management.  Sometimes as a business grows, the essential factors needed to continue its growth and success are forgotten.  Businesses can fall into the trap of feeling that their name has become so big, and therefore growth and success are inevitable.  Let Border’s position and the sale of Blockbuster be a lesson to all entrepreneurs and business owners—never forget the basics needed to run your business.

Neha Sareen is a regular contributor to LegalMatch and the LegalMatch Law Blog.

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