The Bankruptcy Code allows a business in Pennsylvania or elsewhere to file a Chapter 11 bankruptcy. This reorganization provision is generally a plan to restructure the finances and activities of the company and remain in business. Some companies, however, may need Chapter 11 only as a transitional phase where they will continue to operate at least partially, but under a plan that, in the end, will lead to final closing and liquidation.
Delia’s, Inc., a retailer of girls’ clothing, has recently filed under Chapter 11, with a plan of conducting going-out-of-business sales and then liquidating all assets. Under Chapter 11, a company can continue to operate as a “debtor in possession” while it decides on an appropriate reorganization plan. In this case, the company does not seek reorganization, and its plan to liquidate will likely be approved by the bankruptcy judge.
The reason that the company did not simply file a Chapter 7 and liquidate is that it would not be able to continue operating. Its assets would be seized and sold by the Chapter 7 trustee. Chapter 7 is liquidation, and the proceeds would go to creditors, according to certain criteria.
The company here is choosing an orderly, gradual wind-down. The continuation of certain business activities may be more to the benefit of certain creditors. During this wind-down period, with its going-out-of-business sales, the company will get approval to pay wages and salaries, continue benefits and honor certain company programs, such as gift cards.
In fact, it may seem incongruous, but in many Chapter 11 proceedings, both in Pennsylvania or elsewhere, the company will request permission to enter into financing agreements for a line of credit during the phase-out period. In this case, the company is requesting permission to open a $20 million credit line with an LLC investment company. It’s too early to tell exactly how the Delia’s Chapter 11 will turn out, but under the current plan, it would appear that, at some point, it will convert to a Chapter 7 and undergo full liquidation.
Source: marketwatch.com, “dELiA*s, Inc. and Certain of Its Affiliates File for Chapter 11 Bankruptcy”, Jean Fontana, Dec. 8, 2014