You may remember Columbia House. Back in the day it boasted “Eight CDs for a penny.” For years, that offer turned into an annual profit of $1.4 billion at the peak of the company’s operations. According to court filings, Filmed Entertainment Inc., the parent company for Columbia House, has filed for Chapter 11 bankruptcy protection in New York. The company is citing the ever-changing digital and online landscape of the continually eroding music industry.
Chapter 11 Bankruptcy Protection
Under a Chapter 11 bankruptcy protection plan, a debtor is able to reorganize and restructure its financial affairs. The plan is a contract between the debtor and the debtor’s creditors that outlines how a debtor will operate and pay for future obligations.
Often this plan means a debtor will need to downsize operations in order to reduce expenses and free up assets. Often times, as is currently being seen with Chevron and similar oil companies, a move to cut spending and lower costs is a way to recoup some money in order to avoid bankruptcy.
Liquidation and Chapter 11
In some cases, where restructuring will not yield enough income to pay debts, a “liquidation plan” is necessary. Under liquidation, a debtor’s operations are shut down and its remaining property is sold to recoup money to pay off creditors.
Typically, a debtor receives four months to propose a reorganization plan following its initial filing of Chapter 11. This “exclusivity period” can be extended to up to 18 months following the petition date if the debtor is able to show good cause. While it can be extended, it can also be shortened, depending on the circumstances of the filing.
After the “exclusivity period” ends, the creditors’ committee and/ or other parties are able to propose competing reorganization plans. This is a fairly rare practice though. In these cases, it’s typical that a creditor committee or other party will move to either dismiss the bankruptcy filing or convert the case to Chapter 7. During Chapter 7 a bankruptcy trustee cancels many (or all) of the company’s debts. This can also mean the trustee will sell, or “liquidate” some of the property to pay back creditors.
Though rare, occasionally, a Chapter 11 reorganization plan will allow for every creditor to be paid back immediately, and in full. If this is not the case, as per usual, creditors are allowed to vote on whether or not they will accept the proposed Chapter 11 plan.
During this vote, at least one class of “impaired” claims must approve the Chapter plan in order for the plan to be approved by the bankruptcy court. Upon the plan being confirmed, an “impaired” claim is an obligation that will not be paid in full or when originally due.
Bankruptcy Attributed to Failing CD and DVD Markets
As company director Glenn Landberg wrote in the bankruptcy filing, “This decline is directly attributable to a confluence of market factors that substantially altered the manner in which consumers purchase and listen to music, as well as the way consumers purchase and watch movies and television series at home.”
In 1996, the company wielded a yearly profit of $1.4 billion, a stark contrast to the $17 million in revenue it saw in 2014.
The Rise of MP3s, Streaming Services, and Illegal Downloading
In 2010, the company who was once known for their one-penny offers that populated both TV commercial breaks and nearly every issue of music-themed magazines like Rolling Stone, decided it was time to get out of the music industry business. As MP3s, streaming services, and illegal downloads made CDs a thing of the past, so went the offers of CDs for a penny. For the past five years, the company has turned to selling DVDs. But with the rise of Netflix, streaming services, and piracy, it seems the company has little left to offer.
Despite the decline in numbers, the company still has 110,000 members. Total assets were listed at $2 million. Over 250 creditors are owed a total of $63 million. It makes sense that Columbia House’s fall has mirrored the CD and DVD markets. In 2000, roughly $13 billion worth of CDs were sold, compared to $1.85 billion in 2014. DVD sales have plummeted by 50% between 2006 and 2014.
Understanding Bankruptcy: An Overview
Understanding the following aspects of bankruptcy will help you be more prepared to take the next step.
Bankruptcy is Not Quick
Chapter 7 bankruptcy case lasts an average of four months. A Chapter 13 bankruptcy plan lasts for three to five years. A Chapter 11 bankruptcy case may last for two years or longer.
Public Scrutiny During Bankruptcy
When filing bankruptcy you must be prepared to expose your financial life to the public. You will be required to attend a meeting of creditors when you file for bankruptcy protection. During which the bankruptcy trustee (and maybe even one of your creditors) will ask you probing questions in a public room. Often this can be an extremely uncomfortable and embarrassing process.
Disclosing Your Financial Information During Your Bankruptcy Case
You must be completely honest in bankruptcy because bankruptcy courts feel that only the honest debtor is entitled to a discharge of debt. You must list all of your property, debts, and creditors. If you fail to do so you may you lose the bankruptcy discharge. Because dishonesty in bankruptcy is a serious federal crime you might also be subject to an FBI investigation.
Requires Great Attention
Because bankruptcy is based on forms many people perceive it is a simple and straightforward process. But the forms contain complex questions about your financial affairs and require sufficient time to understand the bankruptcy forms before filing for bankruptcy.
Bankruptcy Discharge is Personal
Discharge is the ultimate goal of bankruptcy. It bars your creditors from ever attempting to collect debts from you and you alone, and does not eliminate the debt itself. So, for example, if you are one of the co-signers on a home loan and you file for bankruptcy, the debt is not wiped out and the lender can still seek to collect the debt from your co-signer.
It’s Not Cheap
Filing for bankruptcy can cost you a significant amount of money, especially if you decide tohire an attorney which can cost anywhere from several hundred dollars to several thousand dollars. Even if you decide to prepare and file your own bankruptcy case it can be costly because the filing fees alone are substantial. Debtors may find relief from filing fees by petitioning for a fee waiver. The court bases its waiver decision on your income, which generally must not be greater than 150% of the federal poverty level.
Working with an Attorney
Facing bankruptcy, regardless of if it’s a personal or business bankruptcy, is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at Resnik Hayes Moradi LLP walk you through the process so you can achieve the best outcome possible.