When a business chooses to file for bankruptcy, it has some control over the format it may use. While some New York entities may prefer to use bankruptcy as a way to shut their doors through the Chapter 7 process, others may prefer to use Chapter 11 to reorganize and remain active businesses. However, despite a business's initial choice for the format of bankruptcy it wants to use to get itself out of financial stress, it may have to change paths if its creditors are able to petition for a conversion.
For example, the retailer Sports Authority may be going through just such a conversion process. Sports Authority initially filed for Chapter 11 bankruptcy in an effort to remain solvent and repay its creditors through a comprehensive restructuring and reorganization plan. However, the company's unsecured creditors have filed with the bankruptcy court a request to have the Chapter 11 process turned into a Chapter 7 process. The creditors do not believe that Sports Authority will be able to successfully complete the Chapter 11 requirements and fear that they will not be repaid.
It will be up to the court to decide if Sports Authority will have to convert its proceedings into a Chapter 7 case. If it is required to do so, then instead of staying open for business it will have to begin selling off its assets and winding down its operations so that, eventually, it will close its doors for good.
Knowing what form of business bankruptcy to choose can be difficult. The process of analysis should include the business's needs as well as its likelihood of finding success in its chosen format of bankruptcy. However, as shown by this current news story, even when a business takes the step to find financial stability through bankruptcy, it may see its path changed if its creditors are able to have the process modified.
Source: The Wall Street Journal, "Sports Authority Creditors Seek to Convert Bankruptcy Case to Chapter 7," Lillian Rizzo, July 22, 2016