Bankruptcy

Blockbuster Bankruptcy Fall and Rebirth of a Giant

Blockbuster, Inc. was once a giant when it came to video rentals, especially movies. It seemed no matter where you went, there was a Blockbuster store on a nearby corner or strip mall. That all may be coming to an end. Or will it?

Bankrupt

In late September 2010, Blockbuster filed a petition for Chapter 11 bankruptcy relief in a New York federal court. Why? Mainly because of pressure from Blockbuster's competition, which led to decreased revenues and profits and the inability to pay back mounting debts.

Essentially, more and more of us get our movies and other videos from subscription services like Netflix or stand-alone vending machines like Redbox, not to mention the internet, satellite, and cable. There's not much need to walk into a video store anymore.

What Does It Mean?

Chapter 11 bankruptcy is commonly used by companies like Blockbuster, but individuals like you and I can use Chapter 11 as well. It's a complicated process, but in general here's how it works. The company seeking protection - the debtor - files a petition with the courts. This is a voluntary bankruptcy petition, like Blockbuster's. Another course is an involuntary petition. That's when the company's creditors force the company to file for bankruptcy.

In most cases, after the petition is filed, the company-debtor keeps the company's assets - stores, inventory, etc. - and continues to run the business. The court and a group of the company's largest creditors, called a creditors' committee (committee), keep an eye on the business operations. The idea is for the business to get back on its feet, start making money again, and then pay back the company's creditors over a period of time.

The details of how, when, and how much the creditors are repaid and how the company's business will be run after the bankruptcy is called the reorganization plan. The committee and the company determine the plan and then it must be approved by the court. If the company and the committee can't agree on a plan, or if the court doesn't approve one, the company's assets may be sold or liquidated with the money used to pay off creditors.

According to Blockbuster's proposed plan, it will rise from the ashes of the old company as a new force in the entertainment industry. With new technology and a new strategy it hopes to meet and beat the competition. The plan hasn't been approved, yet.

What It Means To You

A company's Chapter 11 bankruptcy affects many people in different ways. For instance, the bankruptcy may be invisible to most customers. According to Blockbuster, customers are still able to visit stores, use their memberships, and even buy and use gift cards. 

However, Blockbuster employees may lose jobs. While Blockbuster announced its stores will stay open, the final reorganization plan and simple economics may require store closings, temporary or permanent. Economics aside, if Blockbuster continues to pursue vending-machine, online subscription services, or other strategies, the need for employees and brick-and-mortar stores decreases.

Current shareholders are in a tough spot, too. Generally in a Chapter 11 bankruptcy, two things may happen:

  • Your shares in the old company (pre-bankruptcy) may be swapped for shares in the new company - the company as it exists after the reorganization. Usually, you get fewer shares with lower values than pre-bankruptcy shares
  • The other option is even more bleak: You may not get anything for your shares at all - a complete loss. There typically won't be anything left after paying the major creditors if the new company fails and its assets end up being sold

The reorganization plan will spell out exactly what will happen to shares held by current stockholders. Unfortunately, under Blockbuster's proposed plan, most of the current Blockbuster shareholders will lose their entire investments.

Aside from following the plan and staying afloat, the new company faces the challenge of convincing new investors to take a chance on it. It's not an easy road. While Chapter 11 does in fact give a business a second chance, there's no guarantee the new company will thrive and survive. But there's always a chance. Only time will tell.

Questions for Your Attorney

  • What can I do with my shares of Blockbuster right now? Do you recommend investing in the company after the bankruptcy?
  • What affect does the bankruptcy have on my taxes? Do I get a full deduction for my investment losses?
  • I own 500 shares of a company that just announced Chapter 11 bankruptcy. Do I get to vote on the reorganization plan? How do make sure I get the chance to vote?
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