June 20, 2019

Lessons from Reader’s Digest

Reader's Digest logoReader’s Digest just announced that it is filing a prepackaged Chapter 11 bankruptcy case.  Its goal is to reduce its debt to one-fourth of the present level ($2.2 billion).  The company is essentially using Federal bankruptcy law as a financial planning tool.

At the present level of debt, Reader’s Digest is not a viable company.  At the reduced level, it will be viable, thus allowing a partial but significant payment to creditors while saving jobs and assuring further business for its suppliers.

While yes, there will be financial losses, these will be far less than what would have occurred had Reader’s Digest simply closed its doors and cut off the lights.

Two ways of looking at indebtedness

Far too many people look at a company that has heavy debt and say, “The company is not viable.”

I take the view that Reader’s Digest’s management took, and ask, “At what level of debt is the company viable?” Once that is determined, the next question to ask is “How do we reduce the company debt to that level?” As with Reader’s Digest, Chapter 11 can be a way of reaching that level.

Being financially upside-down is not pleasant.  Nevertheless, it does not have to be the kiss of death.

Chapter 11 might be a viable financial planning tool for your business, too.  Seek guidance from a qualified attorney before making any decisions.