Blockbuster is reportedly planning to enter Chapter 11 bankruptcy. Does that mean Blockbuster is going out of business? What will happen to its stores? Here is a review of Chapter 11 and what it means for Blockbuster and its customers.
Blockbuster’s Chapter 11 Bankruptcy
Filing Chapter 11 means that Blockbuster is in financial trouble and is no longer able to meet its obligations to its creditors. According to the LA Times, Blockbuster has lost $1.1 billion in the last 2 years. Chapter 11 bankruptcy allows the company to remain in control of its business decisions with the court providing oversight. This gives the company a chance to reorganize and attempt to remain in business and become profitable again.
Chapter 11 bankruptcy does not mean that a company is going out of business. In some cases, a company that has been through Chapter 11 may need to file for Chapter 7 bankrupcy and do go out of business. In other cases, a company may be successful in creating a reorganization plan that allows the business to stay open and become more successful. In either case, it’s likely that the business will remain open for a period of time after filing for Chapter 11 bankruptcy.
Blockbuster’s Chapter 11 Bankruptcy and Reorganization
There will likely be substantial organizational changes within Blockbuster as a result of filing Chapter 11. The plan would be developed by Blockbuster or its creditors and must be approved by a court. The exact nature of the reorganization is still unclear. Blockbuster has already made several changes in a so-far-unsuccessful effort to be more profitable, including closing stores, expanding its online presence, and creating kiosks. The rate of successful Chapter 11 reorganization may be as low as 10% according to moranlaw.net. If reorganization is not successful, the company may be forced to liquidate under Chapter 7 and would go out of business.
Blockbuster’s Chapter 11 and Gift Cards
All of Blockbuster’s creditors are put “on hold” during Chapter 11 reorganization and cannot attempt to collect on debts. As part of this, companies can choose to no longer accept gift cards. Some companies, such as Circuit City, continue to accept gift cards throughout the Chapter 11 bankruptcy proceedings, but others like Sharper Image declared gift cards invalid. At this time, Blockbuster’s gift card policy if they file Chapter 11 is still unknown.
Many Blockbuster stores will continue to remain open and operational even if Blockbuster files for Chapter 11 bankruptcy as expected in September. Consumers may see few if any changes for weeks, months or even years to come. On the other hand, Blockbuster may make substantial changes such as closing stores or no longer accepting gift cards. Blockbuster may also fail to reorganize successfully and wind up going out of business completely. Since many smaller video rental stores have already closed, Redbox and Netflix would be in a position to take over a lot of Blockbuster’s remaining customers.
Snopes.com: Gift Cards and Bankruptcy
LA Times: Blockbuster tells Hollywood studios it’s preparing for mid-September bankruptcy
USCourts.gov: Bankruptcy Basics