Pacific Sunwear Files for Chapter 11

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In yet another loss for brick-and-mortar retail stores, Pacific Sunwear has filed for Chapter 11 bankruptcy protection. It follows in the footsteps of retailers like Sports Authority and Wet Seal that have declared Chapter 11 over the past few years.

Pacific Sunwear Files for Chapter 11

While beach-life clothing retailer Pacific Sunwear has declared Chapter 11, it still has plans to continue operating its nearly 600 stores via an agreement with private equity firm Golden Gate Capital. Golden Gate Capital has plans to take the company private following the restructure process.

Pac-Sun is just another retailer in a long line, including surfwear retailer Quicksilver, that has had to deal with consumers going online to shop as well as stiff competition from the likes of H&M and Forever 21, two stores that regularly stock trendy affordable fashion.

As Gary H. Schoenfeld, president and CEO at Pacific Sunwear, said in a statement, the restructuring plan with Golden Gate will put Pac-Sun in a “promising position” as it continues its transformation of the brand.

Schoenfeld went on to say that the Chapter 11 bankruptcy process will enable the company to fix two main structural issues including: a high occupancy cost of roughly $140 million per year as well as nearly $90 million of long-term debt that will be coming due later on this year. The CEO has hopes that the bankruptcy process will allow Pac-Sun to reduce its long-term debt by more than 65 percent in addition to reducing its annual occupancy costs through landlord negotiations or rejections of leases. These steps will all be taken to help adjust the fixed costs associated with operating the stores as a means to better match the “shifting retail landscape,” said Schoenfeld.

Considering Bankruptcy?

If you are considering bankruptcy, you’ll want to work with a bankruptcy attorney that can advise you on what form to file. This will be greatly dependent on if you are filing as an individual or as a business. While bankruptcy is a great way to discharge debt so that you can move forward with a clean financial slate. It’s proven to be an effective tool for both consumers and businesses, but it’s important to know that bankruptcy is not the same for consumers and business.

Consumer Bankruptcy – Chapter 7 and 13

Chapter 7 bankruptcy is the most commonly filed bankruptcy for individuals who feel they will not be able to pay back acquired debt. In this form, assets are sold and the money gained from the sale of assets is used to pay back creditors.

Chapter 13 bankruptcy is for individuals who have debt, but have enough income to eventually pay back creditors through a repayment plan.

Determining Form of Consumer Bankruptcy

To determine what form of bankruptcy you will file as a consumer, you will need to take the “means test.” During this test, you are required to supply information about your income. Based on that, it will be determined if you have enough money to pay back creditors through a repayment plan (n Chapter 13) or if you do not have the “means” to back back creditors, and thus need to file Chapter 7.

Corporate and Business Bankruptcy – Chapter 7 and 11

Businesses are able to file Chapter 7, but the company is then dissolved. Assets are then sold off to pay back creditors.

Chapter 11 bankruptcy is the most common form of bankruptcy filed by businesses. This form allows businesses to either reorganize or liquidate assets to repay creditors. Usually Chapter 11 filings lead to reorganizations where the business is allowed to continue operations while paying off creditors.

Individuals are allowed to file Chapter 11, but this is rare and usually reserved for individuals that have a large amount of money.

The Chapter 11 Bankruptcy Filing Process

The Chapter 11 bankruptcy process begins with the filing of a petition in bankruptcy court. Typically the debtor in these cases are corporations, partnerships, and limited liability companies. It should be noted that individuals are able to file Chapter 11 if they have too much debt or income to be able to qualify to file for Chapters 7 and 13.

While Chapter 11 is usually voluntary, sometimes creditors will file an involuntary Chapter 11 against a defaulting debtor.

Typically a debtor will file Chapter 11 where their primary place of business is located, but debtors are also able to file where they are “domiciled." This just means where the business is incorporated or otherwise organized. The process can take anywhere from a few months to be finished, or can continue up to six months to two years.

Business Operations Typically Continue But Court Handles Major Decisions

While most Chapter 7 cases require that a trustee be appointed, a trustee is usually not appointed in Chapter 11. Rather, a debtor will continue day-to-day business operations as a “debtor in possession” (DIP).  A bankruptcy court is able to appoint a trustee if it feels that the debtor has committed fraud, dishonesty, incompetence, or gross mismanagement of the debtor’s affairs.

Though a debtor is able to continue business operations, most major decisions are handed over to a bankruptcy court. Additionally, the bankruptcy court must approve the following:

  • any sale of assets, including property or real property. This excludes inventory sold by a retail debtor during ordinary course of business

  • either entering or breaking a lease of real or personal property

  • mortgages or other secured financing arrangements thatwill allow a debtor to borrow money after the bankruptcy case is filed

  • shutting down business operations

  • expanding business operations

  • entering or modifying contracts and agreements with unions, vendors, licensees or others and,

  • retention of and payment of fees and expenses to attorneys and other professionals.

Creditors Support or Oppose

Creditors, shareholders, and any other parties that hold an interest in the company have the option of either supporting or opposing actions requiring bankruptcy court approval. And the bankruptcy court must consider input from creditors, shareholders, and all other parties with an interest when deciding on how to proceed with the bankruptcy.

Unsecured Debt is not associated with a specific piece of property, which means that there is not specific property that serves as collateral for the debt. Unsecured creditors are able to participate in a Chapter 11 case through a committee that is appointed to represent all of the unsecured creditor’s interests.

Chapter 11 Reorganization Plan

A debtor typically has four months after filing Chapter 11 to propose a reorganization plan. These four months are usually considered exclusive, meaning that the debtor has the exclusive right to come up with the plan. This plan can also be extended or shortened.

After that “exclusivity period” expires, the creditors’ committee is able to propose a reorganization plan, although this is rare. Typically if creditors are dissatisfied with the debtor’s proposed plan, it will move to dismiss or convert the case to Chapter 7.

Confirmation of Chapter 11 Plan

Once a plan is approved it is referred to as “confirmation.” For a Chapter 11 plan to be confirmed, the plan must meet a number of requirements, including:

Feasibility. The proposed plan must be likely to succeed.  This means that a debtor must be able to prove to the court that it will be able to raise enough revenue to cover its expenses over the plan term. This includes making all payments to creditors.

Good Faith. The plan must be proposed in good faith and not by means forbidden under applicable law.

Best Interests of Creditors. The plan must be in the best interests of its creditors.  This means that creditors will receive as much in Chapter 11 as they would have if the debtor had gone through Chapter 7. Sometimes this means that a debtor will be required to pay creditors in full rather than just a fraction of what is owed.

Fair and Equitable. The plan must be deemed “fair and equitable” under the “fair and equitable” test. This means the following must be met:

  • Secured creditors (creditors that have a mortgage against real property or a lien against personal property included inventory or equipment) must be paid, over time, at least the value of their collateral.

  • The debtor is not able to retain anything on account of their equity interests unless all debts are paid in full. These debts can either be paid immediately following the confirmation of the plan, or over time. If paid over time, interest must be included. The bankruptcy court is able to allow equity holders (creditors) to retain ownership interests in the debtor in exchange for any “new money” that is contributed to pay expenses associated with reorganization of the debt. If this is not enabled by the court, equity holders lose all ownership rights once the reorganization plan is confirmed.

Some of the confirmation requirements apply only if the creditors vote against the proposed reorganization plan.

Working with a Bankruptcy Attorney

Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 11 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.

AZBK Lawyers 668 N. 44th St., Ste 320, Phoenix, AZ 85008 (602) 648-3274

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