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Toys "R" Us news shows how two forms of bankruptcy are used

When a company faces financial difficulties and goes into bankruptcy, Chapter 11 is the type most businesses use. Sometimes, however, the hoped-for advantages might not work.

Toys "R" Us recently ran into this problem and is now in the process of converting its Chapter 11 protection for Chapter 7.

Why Chapter 11

Toys "R" Us was losing business due to online competition. The company failed in its attempts to find a buyer and filed for Chapter 11 in September of 2017. This form of bankruptcy protection allows a company to keep its doors open. The big toy retailer wanted to cut debt and restructure so it could become a healthy company again, but apparently that idea has not worked out.

Going to Plan B

After failing to pay its debts, the UK division of the company is now under what is called administration, the British equivalent of bankruptcy. The company has also told its employees that there is no money for severance pay. Here in the US, Toys "R" Us is exchanging its Chapter 11 protection for Chapter 7, which will allow the liquidation of all its assets. The company will also close all its remaining stores. One bright note is that talks are reportedly under way to sell the Asian and European divisions.

The new process

The first step under Chapter 7 is that Toys "R" Us will file notice that it plans to cease doing business. Next, an appointed trustee will sell off company assets. An experienced bankruptcy attorney will tell you that during this phase, the public will probably be able to take advantage of going-out-of-business sales. The proceeds from the sale of assets will go to pay administrative and legal expenses first, and then the debts to secured creditors, with unsecured creditors such as vendors getting whatever is left. It is not often that a giant retailer is forced to consider bankruptcy, but the experience of Toys "R" Us shows that there is more than one remedy a company can considered when it is facing financial peril.

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