Sunday, February 26, 2012

Bankruptcy Research Paper

Research Paper on Bankruptcy

The article in Business Week from the 10th of November “Circuit City Files for Bankruptcy” tells that the nation's second-largest consumer electronics chain has filed for Chapter 11 bankruptcy. It is quite ironic, because this gigantic chain has driven out of business numerous entrepreneurs.

According to the law, a company is allowed to implement a reorganization plan if it files for Chapter 11 bankruptcy. In this case, the control of the debtor’s assets is retained by the company’s executives who propose a plan of reorganization to the creditors which changes the terms on its debts; a plan of reorganization for the bankruptcy has to be approved by court. 

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The plan has to gain the approval of the creditors, most often a committee composed of seven creditors with seven biggest claims. Creditors will make their decision on the information contained in the disclosure statement that sheds light on the company’s assets, liabilities and financial ability to realize the reorganization plan.

The plan of reorganization needs to provide information on secured and unsecured classification of claims and how each class of claims will be treated under the reorganization plan. All claims are separated into classes, with regard to their nature, such as secured or unsecured claims. These classes are defined as impaired or unimpaired, with only impaired classes having the right to vote for approval or disapproval of the company’s reorganization plan. The court approval of the plan can only occur after the plan garners the approval of at least one impaired creditor class.

Experts are not very optimistic about the future of Circuit City, because successful Chapter 11 reorganizations in such industry are rare. Consumers most probably will not buy gift cards or products with extended warranty from a company that has filed for bankruptcy. One of the examples of retailers that have filed bankruptcy is Tweeter. It has undergone reconstruction last year, but now has filed again for Chapter 11 and is going to shut its remaining outlets.

Circuit City is planning now to shut down 155 out of it 1400 stores. The competitors are planning to take advantage of the situation and increase their market shares at the expense of Circuit City’s customers. 

Wal-Mart, Target, Best Buy and online retailers have been actively gaining market shares lately.

Business Week has already written several months ago about anticipated bankruptcy of Circuit City and the company’s stock was loosing its market value for the last two years.

Businesses can fail for various reasons most of which boil down to poor financial and marketing plans that lead to cash crunches when companies are unable to meet their long- and short-term obligations from their cash inflows. Bankruptcy in the past is certain to affect credit rating, leading to a surge in borrowing costs.

Moreover, obtaining a new loan in the first two years after filing for bankruptcy is on the verge of the impossible.
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