Gymboree, the well-known children’s apparel store, has filed for bankruptcy on 6/11/2017. The bankruptcy filing is Gymboree’s strategic move to restructure their debt. Gymboree plans to continue to operate the business as it restructures. There are a few lessons to learn about debt and how to manage overwhelming debt when large companies file for bankruptcy.
1. It Can Happen To Anyone
Anyone can run into difficult financial situations. Even a popular brand like Gymboree can fall into difficult times if debt is mismanaged or revenues and income changes fluctuate to unmanageable levels. You’ve seen these stores in your local mall. When you say the name Gymboree, everyone knows what you are referring to. Gymboree has been synonymous with children’s apparel for a significant part of our lives. What could have happened to derail this business from staying out of bankruptcy?
The purpose of a bankruptcy is to manage debt. Gymboree has defaulted on debt owed to its creditors. All businesses need to use debt to operate. They buy products using debt and sell it to the market, and then repay their creditors when the products have been sold. They may also have used debt to open new stores and facilities hoping to repay creditors when revenues come in. A forecast of revenues allows businesses to estimate how much debt they can take on and continue to make payments towards the debt. When these revenues do not meet what was estimated, the debt payments cannot be made.
It is fundamentally similar to a personal bankruptcy. People take on debt expecting to be able to repay the debt or make regular payments towards the debt. When income unexpectedly changes, the debtor defaults on the debt payments because there is not enough money to repay the debt. A bankruptcy can eliminate debt so that it does not have to be repaid. The difference in Gymboree’s situation is that they are continuing to run the business with income from their existing operations, but they will let the bankruptcy court help them restructure their debt instead of discharge it as a Chapter 7 bankruptcy would in a personal situation.
2. What Does Restructuring Mean?
Restructuring means that the bankruptcy court will analyze all of the finances of Gymboree to figure out what they can really afford to pay back. When the analysis is done, the bankruptcy court will propose a new debt amount and payment structure that they think Gymboree can handle in their current financial situation. Gymboree could possibly have the debt amounts reduced by the bankruptcy court and payments will be set to an affordable level that will allow Gymboree to continue to operate. Why would a creditor agree to this? There is really no alternative. If the bankruptcy court shuts down Gymboree completely, all they can do is liquidate the assets and divide it among the creditors that are owed money. By restructuring the debt, the creditors are going to continue to receive payments as long as the business is operating.
3. How Will Gymboree Continue To Operate?
Since Gymboree still has a well-known brand and many stores that continue to sell clothes, they still have a way to make money. By restructuring their debt in the bankruptcy, the business can continue to operate with smaller debt payments. In basic terms, the bankruptcy court is going to make their bills smaller so that they can handle paying their bills and making money again.
4. Why Is A Chapter 7 Bankruptcy Better Than What Gymboree Is Doing?
If you are in a difficult financial situation at a personal level, you can file a Chapter 7 without restructuring any of your debt. A Chapter 7 can discharge debt completely so that you never have to pay it back. In a personal bankruptcy, you can continue to operate in the sense that you can continue to make money and save funds for the future without paying back any of your debt. Gymboree is going to continue to make money, but they still have to pay back debt. This is similar to a Chapter 13 bankruptcy which is often referred to as a restructuring type of bankruptcy also. If you don’t qualify for a Chapter 7 (meaning that you make too much money for Chapter 7), you can use a Chapter 13 bankruptcy which is similar to what Gymboree is doing in their bankruptcy filing.
Contact Bankruptcy Law Professionals if you have any questions about Chapter 7 or Chapter 13 bankruptcy at (855) 257-7671.