Blockbuster Bankruptcy Fears Grow

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Despite its advantage over rivals Netflix (NSDQ: NFLX) and Redbox in offering new releases for rent, Blockbuster (NYSE: BBI) continued to struggle in Q2. In addition to its poor earnings results, the movie rental chain also issued new warnings about the possibility of a bankruptcy, in a 10-Q filing.

That’s not to say that Blockbuster doesn’t have a chance of avoiding Chapter 11. Last month, the company, which owes $1 billion in debt, entered into a forbearance agreement with about 70 percent of its lenders. The extension of the forbearance period to September 30, 2010 provides Blockbuster with additional time and flexibility to work out its recapitalization plan.

While the bet the company placed on its retail stores has been undoing in the face of competition from Netflix, Redbox and online streaming in general, Blockbuster has been trying to expand its digital services. It struck a partnership with Comcast (NSDQ: CMCSA) that connects its by-mail service to the cable operator’s subs; it also added 6,000 machines to its Blockbuster Express and expanded Blockbuster-On-Demand through Verizon Wireless

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