Houston Matters

Bankruptcy Doesn’t Necessarily Mean Texas Companies Like Men’s Wearhouse and J.C. Penney Will Disappear

A Houston bankruptcy judge says, more often than not, bankruptcy is used to prevent such companies from going out of business completely.

The JCPenney department store at the Memorial City Mall in west Houston.

The Houston company behind Men’s Wearhouse, JoS. A. Bank, and K&G is considering filing for Chapter 11 bankruptcy. As Bloomberg reported this week, Tailored Brands Inc. was already struggling before COVID-19 soured the market.

And that company is not alone. Several hundred Texas firms have filed for Chapter 11 bankruptcy protection since the beginning of the year. That includes several oil and gas companies and popular retailers like J.C. Penney, Neiman Marcus, and Dallas-based Tuesday Morning.

But just because a company’s considering bankruptcy doesn’t mean it’s going out of business. In fact, more often than not, bankruptcy is used to prevent the total loss of business. It can allow potential buyers to come in, merge the company with their own, and reduce its debts.

Jeffrey P. Norman is a judge in the U.S. District and Bankruptcy Courts for the Southern District of Texas. He told Houston Matters with Craig Cohen these are companies simply having trouble making money because they couldn’t open their doors to customers for several weeks.

“I haven’t seen case statistics for May, but for April we had a 100 percent increase in the filing of Chapter 11 in the Southern District of Texas,” Norman said.

How Bankruptcy Works

To help us better understand why and how businesses file for bankruptcies, Norman walks us through the process and terminology. He says most business bankruptcies generally fall into two broad categories.

“The first category would be those businesses that are highly leveraged — that are having problems making debt service,” Norman said. “And then the second category would be those debtors who basically are simply unprofitable. And I think that’s what we’ve seen…with the COVID situation.”

The Big Book of Bankruptcy

To better understand the types of bankruptcy, it might be helpful to think of it as a book, with a title and chapters.

  • Title 11: United States Bankruptcy Code The playbook that debtors, lenders, and courts adhere to when declaring bankruptcy.
  • Chapter 7: Liquidation Bankruptcy When a debt holder agrees to liquidate inventory and assets to discharge debts. The requestor must pass a Means Test Calculation, during which the government determines if the debt holder has limited income below the state median. Housing and vehicles may be held on to so the debtor does not become homeless.
  • Chapter 11: Reorganization Bankruptcy A corporation or partnership can present a reorganization repayment plan to the court for bankruptcy approval. There is a risk with this type of bankruptcy. If the lenders do not like the debtor’s plan, a lender can change Chapter 11 to Chapter 7 and claim their stock, property, and assets. Corporate owner’s personal assets are usually not at risk, only their stock and the company itself. On the other hand, a sole proprietor will be on the hook for their private property. Credit is typically frozen and companies need to use cash on delivery for purchases. Chapter 11 is currently the most common type of bankruptcy due to the pandemic.
  • Chapter 13: Wage Earners Plan This type of bankruptcy may be a misnomer since the debt holder is protected from liquidated assets. This type of bankruptcy calls on a reduced payment plan to lenders, usually small business owners. A debt holder must make over a certain amount per year to have a five-year repayment plan. If the debt holder makes less than the state median, they must repay their debts within three years.

Less Common Bankruptcies:

  • Chapter 9: Municipal This plan works similarly to Chapter 11 but with a city, town, county, or even a school district. In 2013, the City of Detroit filed for this type of bankruptcy after the fall of the automotive industry.
  • Chapter 12: Family Farmers Farmers and fishermen are under this plan that works similarly to Chapter 13.
  • Chapter 15: International Debtor When international firms declare bankruptcy, Chapter 15 provides resources to connect with foreign courts and lenders.

Bankruptcy Sometimes Means A New Beginning

Marvel Comics took a risk while in bankruptcy, taking their best-selling toy, Iron Man, and make a movie to sell merchandise, which pulled the company out of debt and scored them a $4 billion deal with Disney.

In 1996, Marvel Comics declared Chapter 11 bankruptcy after the company began publicly trading its stock, which caused a sales boom when the company flooded the market with collector’s items in order to satisfy stockholders. The boom was followed by an almost immediate bust.

However, bankruptcy reorganization allowed the company to create the 2008 Iron Man film whose success drew the attention of Disney which bought the company for $4 billion dollars in 2009.

“[Bankruptcy] is a mechanism for reorganization — for restructuring and hopefully returning to profitability,” Norman said.

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