Gawker Media filed for Chapter 11 bankruptcy due to their inability to pay a $140 million settlement in the Hulk Hogan lawsuit. There will be an appeal, and many suspect that the damages will be reduced, perhaps even significantly. But if that doesn’t happen, Gawker as a company and website could cease to exist. However, bankruptcy procedures are complex at best, and Chapter 11 does not necessarily mean the company will go out of business. So what does this really mean for Gawker?
[Update: It appears that Gawker will be sold at auction, starting at $90 million]
What Is Chapter 11 Bankruptcy?
It’s one of the most commonly filed bankruptcies, and it essentially means the reorganization of debt. Individuals as well as companies can file for this type of bankruptcy, as it allows the filer to draft a plan to pay back its debt while still retaining assets. In Gawker’s case, it’s been reported that they have less than $100 million in assets, along with hundreds of millions in liabilities, plus large court and attorney fees because of this long court battle, which already total more than $200,000 an will continue to add up.
When a company files for Chapter 11 bankruptcy, it’s crucial that a thorough and detailed plan for repaying creditors and creating a positive return for shareholders be laid out. This plan needs to be filed in court, and must include: schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases and a statement of financial affairs.
Once these initial steps are completed, the debtor – that is, the person who filed for bankruptcy – must renegotiate leases and contracts in an effort to decrease the amount owed. It’s crucial that the debtor stick to the plan filed with the courts and carry it out in a lawful manner, lest worse consequences arrive at their doorstep.
One thing to note is that Gawker has fewer than 500 employees, and could therefore classify itself as a small business. However, they have far more than the approximately $2.5 million ceiling to qualify as a small business debtor. The Chapter 11 bankruptcy process for small businesses is different than with larger companies, but is usually unsustainable because of the legal fees, which cause the company to file for Chapter 7 bankruptcy.
How Is Chapter 11 Different From Other Bankruptcies?
When a business files for Chapter 11, it is still trying to remain afloat and potentially return to profitability, although that is a long shot. There are five different types of bankruptcies, including Chapter 11, that an individual or a company can file, each have their own process and result.
- Chapter 7: This is liquidation. All assets are sold, and the proceeds are used to pay back creditors. There is no attempt to restructure debt, nor to reorganize the company in an attempt to save it.
- Chapter 9: This involves a resolution of municipal debts, and is very rare; only a few hundred cases have been filed since its inception. It gives a municipality protection from creditors while it negotiates a way to pay back its debts. Detroit is the most famous example of this, as it filed for Chapter 9 at the end of 2013, of which it has been able to dig itself out.
- Chapter 12: Passed by Congress in 1986, this deals specifically with family farmers or fisherman, and a plan is installed to pay back debts to creditors within a span of three to five years. This is a more streamlined form of bankruptcy, and helps financially distressed families avoid the complex legal hassle of Chapter 11 or 13 bankruptcy.
- Chapter 13: Similar to Chapter 11, Chapter 13 applies specifically to individuals. They develop a plan to repay creditors in installments over three to five years, and forbids said creditors from starting or continuing collection efforts.
There are many requirements to be eligible for each – for example, the individual or company cannot have filed for any type of bankruptcy within the previous 180 days – and court fees to pay. In Gawker’s case, they hope that the $140 million settlement is substantially reduced so that paying their legal fees, reimbursing creditors and surviving as a business all remain a possibility.
*Featured Image By Simon Q (Flickr: Hulk Hogan @ Impact! TV Taping) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons