Asian Journal- The Filipino-American Community Newspaper

BLOCKBUSTER, the home video rental company, declared in its latest financial regulatory filings that it will likely file for bankruptcy if it is unable to solve its debt problems. The company has been struggling ever since Netflix started doing business with its direct home mail and internet video rental 3 years ago. Recently, another competitor, Red Box, which rents out videos for $1.00 a day through vending machines located at supermarkets added to Blockbuster’s problems.

With Amazon.com and Wal-Mart entry into the home video rental business, Blockbuster’s survival even in the immediate future was unlikely. Due to fierce competition from these start ups, Blockbuster has lost $1.0 billion in the last 2 years. With its present overhead maintaining 4,000 brick and mortar stores in the United States, and 2,500 more stores worldwide, the company will continue losing at least $500 million a year. The monumental losses have whittled down the company’s capital to a paltry $34 million amidst staggering debt incurred to continue operating in the last 2 years of $1.0 billion; Blockbuster is now practically a shell company with nothing but debt. Blockbuster in its present state is certainly bankrupt and has no ability to pay maturing debt. With $1.0 billion of debt, it needs $112 million to pay maturing obligations in the next few months. But because it’s losing more than $40 million a month, it has no way of paying maturing debts. To avoid bankruptcy, Blockbuster is cutting overhead by closing stores which will slash expenses by $200 million. It will also ask its creditors to exchange debt for equity. In other words, creditors will end up owning Blockbuster to wipe out debt. It remains to be seen if creditors will agree to a debt to equity swap because the core business of the company doesn’t seem to be viable. Unlike Blockbuster, Netflix doesn’t have the expense of maintaining stores, and its business concept of mailing videos which members can keep as long as they want without penalty, and Netflix’s recent service of having videos linked straight to your TV is more appealing to customers. Amazon.com is in the same position as Netflix; it doesn’t have to maintain stores. Redbox only has to maintain vending machines, not brick and mortar stores. If creditors do not see a good future for Blockbuster, it may have to file for Chapter 7 bankruptcy this year. Chapter 11 may only delay the inevitable demise of Blockbuster.

Just like Blockbuster, you may have too much debt that threatens your financial well being. Examine your financials. Determine how much debt you have and ask yourself if you have the capacity to handle the debt. Let’s look at the situation of client. She is a registered nurse. Her husband is also a registered nurse. Their household income is $120,000. Their net income is $8,000 a month. These are her monthly necessary expenses: 1st mortgage $4,000, 2nd mortgage $1,000; utilities $500; food $1,000; car payments $1,000; gasoline $500. At this point, the total is $8,000, equal to her net household income. Expenses such as car insurance, laundry, life insurance, school tuition of children are not yet covered. In addition, client owes $50,000 of credit card debt, and husband owes $40,000 of credit card debt. Certainly, client’s financial situation is bad. Even though her gross household income is high at $120,000, her net income cannot cover monthly necessary expenses. Further, there is no income left to pay down credit card debt of $90,000. Just to keep $90,000 of credit cards current this month, client has to pay at least $2,700 of minimum payments. But she has no income left to pay $2,700 to credit cards monthly. This is quite easily seen. Therefore, she has no ability to pay her debts. Just like Blockbuster, client is bankrupt. But unlike Blockbuster, getting rid of her debts through bankruptcy will make her productive again. Without credit card debt and after her cars are paid off, she can cover all her expenses and perhaps even start saving money again.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.