Reading about Rite Aid filing for bankruptcy. They have 3.3 in debt. By claiming bankruptcy they just wash their hands of it? Who eats all the debt?
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Ultimately, some of the creditors won’t be repaid as originally agreed.
Creditors will accept a restructured payment plan if they do believe that they have a better chance of being repaid more if the company is given better terms on it’s obligations than if it were allowed to continue running until it was forced to liquidate and cease operations.
In bankruptcy “they” becomes a different group of people. Very roughly, the people who owned Rite Aid before hand the business in its entirety over to the people who loaned Rite Aid the $3.3bn in debt. It’s worth less than $3.3bn. The owners lose everything, and the lenders lose something, and the bankruptcy process is designed to force everyone to work together on the plan, so that all the different people who loaned Rite Aid money don’t step on each other and destroy something valuable in the process.
Edit: helpful to add one more example maybe: think about this in the context of a person owning a house. The bank lent them money to buy it. They go bankrupt (or at least they “default” and can’t pay the mortgage). The bank gets the house, which might be worth less than they lent, but in exchange they can’t come after the person for the rest of the money anymore.
The company is just an inanimate object. The company is owned by the shareholders who are the ones controlling everything. They have invested money into the company and can get money out of the company whenever there is profits. Another group of people who have put money into the company is the debtors. These have either loaned the company money or have provided goods or services to the company and is waiting for payment. This does also include winners of lawsuits as well as the tax office.
When a company goes bankrupt the owners no longer owns the company. Anything they have invested into the company is lost to them. So they lost all their invested money. Control of the company is transferred to the debtors. It is kind of unfortunate for them as they expected payment in cash but now ended up owning a company that loses money. It is now up to the new owners to find out what to do with this company. Often they want to sell parts of it, if not the entire company. In some cases the creditors can continue running the company as before, at least for some time. But most often someone comes along and buy the company, paying off most of the debtors, and then continue to run the company trying to make it profitable.
There are different kinds of bankruptcy. The one Rite Aid is doing is called a “reorganization.” They aren’t going out of business. A reorganization allows a business to propose repayment of their debt on new terms that are different than what their debts require right now. That plan has to be approved by a majority of the creditors. It lets them change the terms of their debt, but doesn’t result in that debt being completely wiped clean. The reason creditors might accept this is because they might be more likely to be repaid. If creditors don’t approve a plan, Rite Aid might file a “going out of business” bankruptcy, where everything they own is sold and used to pay the creditors. Usually in that case, the creditors wind up being paid a fraction of what they are owed.
Rite-Aid has filed for Chapter 11 bankruptcy. Chapter 11 is for the reorganization of debt. By filing a Chapter 11, a company is essentially saying “we could be a profitable, viable company IF we could renegotiate the terms of our debt.” A chapter 11 debtor has an opportunity to bring all its creditors to the table to renegotiate a new “plan” for repaying the debt, as well as an opportunity to “cram down” a plan on non-consenting parties.
Creditors generally have some incentive to renegotiate a deal since the alternative is that the Chapter 11 “craters,” i.e., becomes a Chapter 7, which is strictly about liquidation. In a Chapter 7, all of the debtor’s assets are sold, the monies are paid out to the creditors, and the debtor (if they’re a company) ceases to exist. So a lot of the company’s more major creditors (landlords, inventory financiers, etc.) have a solid incentive to renegotiate, which usually just means getting repaid over a longer period of time. A lot of creditors are willing to play ball for a chance at getting full (if delayed) repayment, when the alternative is that everything gets liquidated and they get paid like 50 cents on the dollar.
In any bankruptcy proceeding, it’s usually the shareholders who have the least protection, so they often get wiped out. But that’s not a major concern between the company and its creditors.
So, *ideally*, RiteAid will still be obligated to repay that $3.3 bn (or close to it), but it will be able to make those payments on more favorable terms. Of course, that’s a very simplistic take and any number of things could arise in the interim that crater the Chapter 11 altogether. Overwhelmingly, *most* Chapter 11’s do crater, but when they do succeed, it’s usually in a case like this where you have a very sophisticated debtor with a lot of assets and cash flow to work with.
And of course one outcome is that someone comes along to buy RiteAid. At the very least, this would require a buyer to infuse enough capital to bring the company current with its debt obligations. Companies are bought out of bankruptcy all the time, and that may well be what RiteAid is angling for (I don’t know enough about the case to say).
There are two kinds of bankruptcy in the US for businesses: restructuring and liquidation. Liquidation-type bankruptcy is the classic type of bankruptcy in which the company hands over all of their assets to a bankruptcy court-appointed trustee who then liquidates all of the assets to repay as much of the debt as possible. After that, the company is shut down. The restructuring form of bankruptcy simply pauses debt payments to allow the indebted company to negotiate with its creditors to restructure their debt payments. Typically a company will go the restructuring route if the problem is a liquidity issue and the liquidation route if it’s a solvency issue.
So the type of bankruptcy that Rite Aid is filing for, is a Chapter 11, or a restructuring bankruptcy, it is the equivalent of the following:
Lets say you borrowed $10,000 from your parents to buy a car, because you got a job on the other side of the city, and for this example lets say that public transit does not exist. You buy your car and start working. You pay your parents back $500/month which includes interest.
Lets say that your job has a shutdown and they lay you off for the summer. You know that you will be going back to work in the fall, but for now your income has dropped off and you can no longer make the payments to your parents.
You have two options, you can either file chapter 7 bankruptcy, and tell your parents that you are out, you quit your job, and they can sell your car to get back whatever they can.
OR you can file chapter 11 banktuptcy, where your parents can decide to either let you skip some payments, or they can reduce the total that you owe. The idea being that if you lose the car come the fall, you will not be able to get back to work, and your parents pretty much lose every hope of getting their money back. They can agree away quite a lot in this stage and still be ahead of the chapter 7, as who knows how much the car will sell for, likely a fraction of the loan.
Once chapter 11 has completed, both parties hope that in the fall your income will come back and you go back to repaying, making everyone happy. Maybe you even get a raise, and are able to repay faster. Win win.
Case 1 : You are legally bound by a contract to pay some money at a certain date that has finally arrived but even if you sell everything you own you don’t have enough money. Bankruptcy by insolvency.
Case 2 : You are legally bound by a contract to pay some money at a certain date that has finally arrived but you don’t have the cash on your hands. You could sell your house but selling a house takes months and the contract said to pay *now*. Bankruptcy by illiquidity.
Seeing debt default coming, bankruptcy is declared and everything you own is sold to try to pay back all the people you owe money to. If there are leftovers, usually there isn’t, it goes to the owners (the shareholders).
For the people who lend you money, when you can’t pay debt anymore they are screwed so they are usually willing to negotiate better conditions rather than lose most of their investment.
Since bankruptcy causes a lot of disruption and headache for everyone, each country has a lot of legal procedures surrounding bankruptcy. Some of them to try to keep the company running with renegociated debt terms instead of selling everything.
In the USA, when you are company and everything is sold, it is usually a bankruptcy according to chapter 7 of title 11 of the US Code, and when there is a reorganisation to try to keep the whole thing afloat, it’s chapter 11. If it’s a private individual it’s chapter 13.
So you’re starting a lemonade stand. You get money from your sister, sugar from your neighbor, cups from your cousin, Lemons from your teacher, etc. You promise to repay them for these things on varying terms. You also all generally agree if issues arise in the future your parents will help determine the best course forward.
So you start your lemonade stand. It goes well and you open a few other stands in the neighborhood. You also maybe get your uncle to loan you wood to build more stands and your friend loans you markers and papers for signs.
Suddenly you hit a snag! People have lost their cravings for lemonade and you’re not selling as much as you used to. Lemonade is no longer the top drink on the street. Also, you had a few bad lemons and served some lemonade that made some of the kids sick and now their parents are demanding money.
At this point you’re also falling behind in repaying all those people that loaned you things in starting and continuing their business. They’re getting antsy. They’re starting to ask questions so you all agree to go to your parents for a solution.
The most likely plan you’ll start with is reorganizing your operation. Maybe your cousin you’ve been paying back $2 a week for a year agrees to $1 a week for two years. Maybe your teacher decides instead of paying her back $5 a month, she’ll just take a nickel from every cup of lemonade you sell. You might decide to scrap your stand on maple street because it is doing really bad and sell the wood, glasses, signs, etc. to pay some of the people you owe. Maybe you decide you’ll start selling Apple juice too because it’s more popular.
As long as the majority of the people agree on the plan and your parents approve it then you can continue to operate under these new terms.
There are also other options/scenarios.
Possibly a rich family friend from the nicer neighborhood steps in. They see you’re in a pickle and work out an arrangement with you to continue operations. They might still see promise in your lemonade stands and claim some stake in your stand to help keep it going. All those family and friends are also more reassured with this rich family friend involved because they might get their money back sooner.
Then there’s the scenario where an established business in the food industry takes interest. Possibly Panera Bread has been looking to get into the neighborhood lemonade stand market. They offer you a little bit for your operation. You oblige because at this point you want to get them off your hands. Just like with the rich family friend, all the people you owe also agree to this arrangement because they feel more confident in Panera than you at this point.
If you’re really deep in the hole and all else fails there is a final option. You sell off everything you have left in the operation. The chairs, leftover lemons, the cups, the wood for the stands, etc. Then you move forward in paying people back.
Generally, you’ll often owe more to the people than you got selling everything off. So say you owe everyone $120, but after everything is sold you only have $60. Then some people are going to come up short.
Also your parents oversee the whole process while you do it. This is done for many reasons. Maybe you sell some of your $5 lemons to your friend Jimmy for $2 and then he sells them at the farmers market again for $5 and splits the $3 profit with you. Maybe your lemonade stand has some cool limited edition batman cups you liked and you swipe before you have to sell things off. Your parents don’t want you profiting in this process.
Each person you owe has a different priority in getting paid back and what portion they get of that $60 that’s left. Your parents know the rules and watch you/guide you as you do it. Maybe per the rules your uncle gets paid first, then your cousin, then your teacher, then those kids you made sick, etc.
Also you usually have to pay a fee to your parents for having to arbitrate all of this. You also likely have your brother acting as a liaison between you and your parents and the people you owe. He’s also gonna want a cut too.
There’s also the, pretty rare, circumstance where you still owe more after that $60 is distributed. This is usually done if it’s found out you lied to all the people that loaned stuff to you. Even though you told them about a lemonade stand, you actually used your uncle’s wood for a skate ramp and the sugar to make cupcakes.
Your parents will be very upset with you if that’s the case. You’re likely to be put in timeout. They’re also going to sell your skateboard and PlayStation so they can repay all the people you lied to.
You may have also known your lemonade stand wasn’t doing well. So right before you went to your parents, you took the $20 in the lemonade stand piggy bank and gave it to yourself as a bonus. If your parents find out about that they’re going to try to get it back.
There’s a possibility that you were using the lemonade stand supplies for yourself a lot. If your parents find out about that as well they’ll probably take away some of the things you love to sell to repay the people you owe. That’s because you mixed your lemonade stand with your play things, so your play things will have to go bye bye too.
Finally, there are some circumstances where after you satisfy everyone you owe there’s still some money. You owe everyone $120. You have to pay your parents $10 and your brother that was helping you $10. However, you got $150 selling everything. Generally, you get to keep that leftover $10.
These ELI5 responses may be slightly tainted by your usage of an actual example. As you may now be aware, there are different types of bankruptcies and so tying into a specific case then comes with all the nuances that then muddy up a general understanding.
Generally speaking – in the event of bankruptcy, the company gets taken over by administrators with one main purpose – to pay back the creditors (lenders as much as they can). This is done usually through liquidation of assets i.e. cash, and selling of company property.
Importantly – with the company owners basically now obligated into prioritising settling debt, shareholders are usually prohibited from selling off their shares. If you have shares in Robinhood then expect the “Sell” button to be greyed out and disabled for your stock in this particular company.
>By claiming bankruptcy they just wash their hands of it? Who eats all the debt?
Well, the directors of the company now have it on record that they drove a company into bankruptcy – and I think they have to declare this whenever they apply for anything, including a managerial job.
If the admin can pay the lenders back whilst still leaving some value in the company then that’s a plus. Otherwise, if the company can’t generate enough money from the asset liquidation to pay off the debt, then the company becomes insolvent – and any remaining unpaid debt gets written off i.e. cancelled. The lenders lose their money.
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