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Blockbuster, once the king of video rentals, is preparing to file for bankruptcy next month. Blockbuster hopes to use time in Chapter 11 to restructure their debt load. The company has nearly $1 billion in debts and hopes to escape leases on over 500 stores.
The Blockbuster bankruptcy comes largely as a result of the company's inability to shift gears into the digital age. Netflix and Redbox made renting movies online and from kiosks faster, easier and cheaper than going to a Blockbuster. Even as the company began offering services similar to Netflix, the Blockbuster bankruptcy became inventible as the company was sinking under its massive debt, reports The Los Angeles Times.
The situation is unfortunate, but one which can happen to any business when it takes on too much debt and doesn't have the revenue to pay the bills. For a small business owner, the numbers may be much smaller, but the situation is analogous. At some point, a business owner may need to face the reality that the company is not viable and will become insolvent.
In such a situation, reorganizing under bankruptcy can be helpful as it can often relieve the business of some of its liabilities. For a small business wishing to reorganize and attempt to become solvent, Chapter 11 bankruptcy can be used as a reorganization proceeding to reorganize outstanding debts and continue to operate the business. One benefit is that bankruptcy creates an automatic stay, which prevents creditors from trying to collect their debts without first getting approval of the bankruptcy court. Another benefit is that the company can reduce debts, and repay a portion of obligations and discharge others. The company prepares a plan of reorganization which must be approved by a majority of the creditors. If approved, the debtor and the creditors are bound to its terms of repayment.
However, the reality of the situation is that it is very difficult to salvage a business in a Chapter 11 proceeding. Many Chapter 11 bankruptcies eventually become Chapter 7 liquidation bankruptcies.