One Sad Ending, One Hopeful Beginning Using The Bankruptcy Safety Net

April 23, 2008 6:53 am Published by

In an earlier blog I discussed some of the similarities between the bankruptcies of Sharper Image and ATA Airlines.  I explained that, as a business bankruptcy attorney in Indiana, I always read up on factors that lead companies to struggle financially.  I want to take away from these accounts lessons that can help me advise my own bankruptcy clients. 

Both Sharper Image and ATA originally chose to file Chapter 11 bankruptcy.  Typically Chapter 11 is filed by a company wants to try to reorganize its business and become profitable again.  In a Chapter 11 situation, the management of the company continues to run the day-to-day operations, but the bankruptcy court must approve all significant business decisions.  The creditors cannot interfere with the company’s operations, and the business is given time to negotiate a plan with the creditors to pay off at least part of the debts. (This situation is in contrast to a Chapter 7 bankruptcy filing, in which a company stops operating entirely.  In a Chapter 7, the court appoints a bankruptcy trustee to liquidate the company’s assets and use the money to pay off the debts. )

As a customer of Sharper Image, you would not experience anything other than “business as usual” when entering one of their stores or ordering online or through a catalog in the days and weeks following the filing.  Same thing with ATA – originally!  In the two years following ATA’s original filing of Chapter 11, you would have been able to fly from Indianapolis to your destination and back without seeing any difference in the service. 

It remains to be seen how Sharper Image’s saga will play out.  Unfortunately, ATA’s reorganization plan was not enough to save the company.  A few weeks ago, all operations were suspended at ATA, all service cancelled, all employees let go, and ATA turned to the bankruptcy courts for help in a liquidation plan.  

So, looking at these two companies, which is a better choice – Chapter 7 or Chapter 11? Chapter 7 is for businesses that can see no financial future; the business is so far in debt that there is no need for a restructuring plan.  Should business owners at least consider filing Chapter 11 and try every possible way to keep the business running?  Yes,  assuming the owners think they have a chance, with the help of the bankruptcy court and a lot of hard work and hard decision-making, to pull out of their rut.  That’s probably what the decision-makers at ATA thought two years ago, but sadly, timing was bad and their problems proved too much to handle.

Most of my business bankruptcy clients have companies much. much smaller than either ATA or Sharper Image.  But I make sure to discuss all possible strategies with each owner.  Bankruptcy law is there to offer a safety net, and it’s important to consider all the different ways in which that safety net can help.

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This post was written by Mark Zuckerberg

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