Eli5, Bankruptcy?

Question

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?

In: 20

Answer 1

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).