Radio Shack’s Decline Highlights Use of Bankruptcy in Reorganizing a Business

Retail is a risky business, even during the best of economic times. But, in the present climate, even large, well-established retailers are struggling to survive. Consider the case of Radio Shack, the 94-year-old electronics retailer, which filed for bankruptcy on February 5th. As part of a court-supervised reorganization, Radio Shack is expected to close about half of its 4,000 stores—including several dozen outlets in Florida—and sell the remaining outlets to a willing buyer.

What Exactly Is Bankruptcy?

Although we are all familiar with the concept of “bankruptcy,” how does it actually work when dealing with a business like Radio Shack? You may be asking: is a corporate bankruptcy the same as a personal bankruptcy?

Unlike many legal matters affecting retailers at the state and local levels, bankruptcy is strictly a matter of federal law. Congress establishes a uniform law of bankruptcy. The present system has several different provisions or chapters—most notably, Chapters 7, 11 and 13.

Most business bankruptcies, like Radio Shack’s, fall under Chapter 11. Unlike a Chapter 7 bankruptcy, where the business must be closed and liquidated in its entirety, Chapter 11 allows a bankrupt company to seek a “reorganization” of its operations in an effort to remain open. When a company files for Chapter 11 protection, it submits a proposed reorganization plan to a federal bankruptcy judge.

For example, Radio Shack has already identified a potential buyer for several of its stores. This does not automatically mean the bankruptcy judge will approve this buyer. In a bankruptcy case, the court appoints a trustee to monitor and supervise the company. This includes soliciting offers from other potential buyers. Ultimately, it will be up to the judge to decide which is the best offer and act accordingly. Once a reorganization is approved, the company can exit bankruptcy.

Does a Business Bankruptcy Affect My Personal Assets?

The whole point of bankruptcy is to “wipe the slate clean” as it were. Once a business enters bankruptcy protection, creditors may no longer attempt to collect any debts owed by the business. The bankruptcy judge will determine how much, if any, the creditors get paid. Many unsecured debt holders and other parties, such as stockholders, will get little to nothing.

But what about a small retailer where there are just one or two owners? Do they stand to lose personal assets, such as their houses, if their business goes bankrupt? That depends on how the business is organized. If the owners incorporated their business, like Radio Shack, then the bankruptcy will not touch their personal assets. A corporation (or limited liability company) limits the liability of the owners to their investment in the business itself. But, if the business is a sole proprietorship or general partnership, as many small retailers are, then the bankruptcy court may use the owners’ personal assets to pay off creditors. In these situations, there is no legal distinction between the owners and the business.

If you are a small business owner contemplating bankruptcy, it is important you seek competent legal advice. Bankruptcy is not a simple matter, and it is not something you should attempt to do on your own. If you need to speak with an experienced Florida business attorney on this subject, contact John S. Sarrett today.

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