Why The Toys R Us Reorganization Failed

Bankruptcy is normally a fresh start for distressed debtors in Illinois and Indiana. However, there are very few guarantees in life. And, there is certainly no guarantee that a consumer bankruptcy will be a financial mulligan for you and your family.

Things definitely did not work out that way for the giant toy retailer. Less than six months after the company filed Chapter 11 bankruptcy with the hopes of reorganizing and staying afloat, CEO Dave Brandon, who said he was “devastated that we have reached this point,” told shareholders that the company would liquidate its assets and close all 735 of its stores. Many former customers were very nostalgic about the closing. But the big-box specialty retailer was simply unable to compete with online retailers, like Amazon, and multi-faceted retailers, like Walmart.

Barring an unforeseen, last-minute buyout, all Toys R Us stores will close by April 2018.

Commercial v Consumer Bankruptcy

Large-scale liquidations like this one almost never occur in consumer bankruptcies, even though Chapter 7 is sometimes called “liquidation.” The generous exemptions in Illinois and Indiana only apply in consumer cases.

Value is often a question in consumer liquidation cases as well. Even if the asset, such as an old car or boat, is not exempt, the trustee (person who oversees the bankruptcy for the judge) often allows the debtor to retain it. Assume that an old fishing boat is worth $2,000. By the time the trustee repossesses it, stores it, makes any necessary repairs, cleans it up for sale, and keeps storing it until a qualified buyer comes forward, there may be no money left to distribute to creditors.

Since repossession is seldom in the creditors’ best interest, the trustee usually does not seize nonexempt items unless they are extremely liquid, like case, or extremely valuable, like a new sports car with no lien.

Toys R Us Had Too Much Debt

The retailer had an estimated $5 billion in debt. That’s an astronomical amount for a store facing diminishing sales due to increased competition. In the end, it was simply too much.

In many ways, Chapter 13 is much like Chapter 11. Both kinds of bankruptcy offer protected repayment periods for debtors. They use this time to catch up on past-due obligations and moneylenders are unable to threaten them during this process.

But there are some major differences. As the Toys R Us bankruptcy shows, Chapter 11 is often a last-ditch effort that has little chance of success. But Chapter 13 debtors know at the time they file their schedules whether or not their plan is sustainable. So, there is much more hope attached to a Chapter 13.

Furthermore, as mentioned earlier, most consumer assets are exempt in a Chapter 7. So, if Chapter 13 debtors must convert, they get to keep most of their assets, providing that there is no mortgage or other secured obligation.

Toys R Us Filed Bankruptcy at A Bad Time

The retailer filed in September, just as the holiday shopping season was about to begin. In a highly-competitive environment, any sign of weakness is ordinarily enough to drive customers elsewhere. That’s especially true with regard to holiday shopping. So much spending during this period involves either returns or gift cards, and these items are very uncertain.

Timing is important in a consumer bankruptcy as well. An early filing may feel like using a chainsaw to kill a housefly, and a delayed filing may be too late. The best approach is to partner with an attorney early in the process, so you can get solid advice as to your petition’s timing.

Connect with Experienced Attorneys

The lessons in Toys R Us’ failure help consumers make roadmaps for success. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

usatoday.com/story/money/business/2018/03/15/toys-r-us-files-bankruptcy-liquidation/427129002/