Published on:

Retail Giant Toys R Us Is Preparing to Convert its Bankruptcy from Chapter 11 to Chapter 7 and Liquidate, According to Reports

Legal News GavelReports swirled for months about the financial health of the toy retail giant, Toys R Us, especially after the store filed for Chapter 11 bankruptcy. Several recent reports paint an especially ominous picture, since sources have indicated that Toys R Us will convert its Chapter 11 bankruptcy reorganization into a Chapter 7 liquidation. The increasingly bleak picture for Toys R Us does, however, serve as a reminder of some useful points of bankruptcy law:  namely, the conversion from a Chapter 11 to a Chapter 7, or vice versa. For analysis regarding your options in bankruptcy, make sure you have a knowledgeable Florida bankruptcy attorney representing you.

The toy retailer initially filed a voluntary Chapter 11 bankruptcy filing in September 2017. At that time, the business had $4.9 billion in debt. Six months later, the efforts to keep the business going may not have been successful. The store’s holiday season sales fell short of targets, and some reports indicated that the store missed a vendor payment. With these setbacks, the odds of the chain converting its bankruptcy filing to a Chapter 7 and beginning the liquidation process immediately have significantly increased.

So what goes into the decision regarding whether to file a Chapter 11 or Chapter 7 bankruptcy? One thing that may influence this decision is control. A debtor loses control of its assets immediately upon filing a Chapter 7 bankruptcy, since a bankruptcy trustee then takes control of the assets and liquidates them in accordance with the law. Due to this total loss of control immediately after filing a Chapter 7 bankruptcy, many businesses that harbor any realistic prospects of reorganizing successfully and surviving will initially elect to file a Chapter 11 bankruptcy.

A debtor may voluntarily convert its Chapter 11 bankruptcy to a Chapter 7 bankruptcy at a later date in most circumstances. Often, the reason why a judge might reject such a voluntary conversion by a debtor from Chapter 11 to Chapter 7 involves the court’s conclusion that the debtor attempted the conversion in bad faith. One thing of which debtors should remain aware, however, is that they are not the only ones who can trigger a conversion of their bankruptcy. In some situations, a creditor may be able to obtain an involuntary conversion of a debtor’s bankruptcy from Chapter 11 to Chapter 7. This request for an involuntary conversion must be made “for cause.” Section 1112(b)(4) of the Bankruptcy Code lays out 16 bases that can meet the “for cause” requirement and trigger an involuntary conversion. Most of those 16 criteria generally involve the court making a determination that the debtor will not be able to make the Chapter 11 payment plan.

In addition to a debtor’s problems making mandatory payments, a creditor can also seek involuntary conversion if the debtor makes certain procedural mistakes, including failing to comply with an order of the court or failing “timely to provide information or attend meetings reasonably requested by the United States trustee.”

This last point contains a critical piece of knowledge:  compliance with procedural requirements matters a great deal in bankruptcy. Failing to comply can have catastrophic consequences, like an involuntary conversion of your Chapter 11 bankruptcy to a Chapter 7 liquidation.

For businesses considering bankruptcy, there are many options potentially available, both within and outside bankruptcy. To get knowledgeable advice about your available avenues and what makes sense for your business interests, talk to the experienced South Florida business bankruptcy attorneys at Stok Folk + Kon. Our attorneys have been delivering beneficial advice and effective representation to our bankruptcy clients for many years.

Contact us online or by calling (305) 935-4440 to schedule your consultation and find out how this firm can help you protect your interests.

More blog posts:

Penalties for a Bad Faith Chapter 11 Bankruptcy Filing in Florida, Florida Business Lawyers Blog, Aug. 9, 2017

U.S. Supreme Court to Rule on Structured Dismissal in Chapter 11 Case, Florida Business Lawyers Blog, March 31, 2017

Photo Credit: Waycool27, [CC0 License], via Wikimedia Commons