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Bookstore mega chain Borders files for chapter 11 bankruptcy

Today, Borders Group Inc. filed for chapter 11 bankruptcy. The filing comes after months of failed maneuvers aimed at avoiding bankruptcy. The group, which operates Borders and Waldenbooks bookstores, finally announced that it does not have the necessary capital to meet its financial obligations.

As the country's second largest "brick and mortar" book seller, Borders has faced many challenges in recent years. This announcement was not unexpected, and bankruptcy protection may help Borders come back stronger than before.

Borders' biggest unsecured creditors are five book publishing houses: Penguin Putnam Inc., Hachette Book Group, Simon & Schuster Inc., Random House and Harper Collins Publishers. The companies stand to lose the most if Borders is unable to pay back the money they owe.

Chapter 11 bankruptcy reorganization is not the best way for all companies to resolve debt issues. In fact, for small businesses, chapter 7 or 13 may be a better option. However, for companies of Borders' size, chapter 11 offers many opportunities. First and foremost, chapter 11 bankruptcy gives Borders the chance to close stores, reorganize its internal operating structure and access new capital.

The company will continue to operate in bankruptcy. However, the company president said today that Borders plans to close about 30 percent of the 644 stores they currently operate.

To make ends meet during this time, GE Capital has agreed to loan Borders $505 million. That loan is subject to the bankruptcy court's approval. If approved, it will help ensure that the stores Borders chooses to keep open will be able to continue operating.

As you can see, chapter 11 bankruptcy is not an easy solution to Borders' debt. But it may be the best way for the company to reorganize and get back to business.

Source: Wall Street Journal, "Borders Files for Chapter 11 Bankruptcy Protection," Joseph Checkler and Eric Morath, 16 Feb 2011

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