What Is Chapter 11 Bankruptcy?

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Both J.Crew and Neiman Marcus have filed for Chapter 11 bankruptcy, so what does it mean when a company files for bankruptcy?

Rebecca Rose Woodland joined TheStreet to discuss bankruptcy.

Watch the full video above for more.

Video Transcript:

Katherine Ross: We're starting to see and hear a lot more about bankruptcies from reports about companies considering filing to companies like J.Crew who have officially filed. So joining me to explain what it means when a company files Chapter 11 bankruptcy is Rebecca Rose, Woodland litigator, and legal analysts. Rebecca, let's start there. What is Chapter 11?

Rebecca Rose Woodland: So chapter 11 bankruptcy is where a company files in a bankruptcy court with a judge and asks that the judge helps them reorganize their business. Usually those are companies that are facing high amounts of debt and debt repayment and they're not having income coming in, revenue coming in. So they ask the judge, can we sit down and work it out with the debt holders, people who we owe money to, what we can't pay them right now, let's reorganize. So it's been called chapter 11 reorganization because there's an attempt to reorganize the business, reorganize the debt, and try to have the company move forward and continue its business and when the revenues come in, they pay down the debt that's been reorganized.

Katherine Ross: What happens if you declare Chapter 11 bankruptcy? What's the next step for companies?

Rebecca Rose Woodland: So what happens in a chapter 11 bankruptcy, which is what we're seeing and we see this with J Crew two days ago we're hearing that there's a possibility, Neiman Marcus Group, Forever 21 a lot of the big mall retailers it looks like might be on the verge, JCPenney as well. They try to then sit with their creditors and they try to reorganize. They try to talk about how they can come to an agreement to not pay as much money every month while they wait for an increase in revenue to pay off that money. Now we see normally a 10 to 15% success rate with a reorganization, so only 10 to 15% of companies are able to pull themselves out, become successful again, pay off their debt and move forward.

Rebecca Rose: So that means then an 85 to 90% rate of companies that cannot do that. That then fall into what we call a Chapter seven bankruptcy, which is where the courts and the company decide to shut the company down and they just sell off their assets to pay the creditors and they end their existence or they sell their name to a licensor that takes them back into a different stream of business after the chapter seven which we see with authentic brands group and other groups like that, that tend to come in and they can buy names to move the company forward, but that it then becomes a different company.

Katherine Ross: Rebecca, thank you so much for taking the time to join us today and for more on the coronavirus pandemic and its impact on businesses head on over to thestreet.com.

Disclosure:  Authentic Brands owns Sports Illustrated, which is operated under license by The Maven, the owner of TheStreet

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