PARSIPPANY, N.J. ― Jackson Hewitt Tax Service Inc. filed for a pre-packaged Chapter 11 bankruptcy, as the second largest U.S. tax preparer finally reached an agreement with its lenders on how to restructure its debt.
Jackson Hewitt got into trouble with its lenders as it failed to secure full funding for tax-refund loans, a key covenant in its credit agreement.
Tax-refund loans, also known as refund anticipation loans are offered by tax preparers and funded by various banks, but banking regulators are clamping down on such loans, calling them unsafe.
Jackson Hewitt received waivers on the covenants in the past, but the regulatory clampdown made it virtually impossible to secure funding for the loans, making further waivers unlikely, setting the stage for a pre-packaged bankruptcy.
While under bankruptcy protection, Jackson Hewitt said it would have the liquidity to operate in the normal course of business and begin preparations for the 2012 tax season.
However, Jackson Hewitt in its business plan has excluded any revenue from tax-refund loans, as it is doubtful that it would manage to secure the funding.
Jackson Hewitt earns most of its revenue during the tax season from November to April through its franchises and tax preparation agreement with Walmart stores. In 2010, about 24 percent of the tax returns prepared by the company were generated in Walmart stores.
In pre-arranged bankruptcies, companies and their creditors agree on a reorganization plan prior to the filing, finding it an efficient way to get through the court process. Companies that make pre-packaged filings are often able to exit court protection in 30-90 days.
Jackson Hewitt expects its restructuring plan to be fully implemented in 45-60 days and sees no disruption in its day-to-day operations.
In March, Jackson Hewitt said it was working with its lenders on a restructuring plan that could include a pre-packaged bankruptcy as it struggled to deal with its ballooning debt.
In court papers, the company listed assets of $388.6 million and debt of $444.8 million. The Chapter 11 petition also included five affiliates of the company.
Jackson Hewitt’s lawyers Skadden, Arps, Slate, Meagher & Flom LLC declined to comment and the company did not immediately reply to calls requesting comment.