"Will Circuit City [Stores] join the long list of electronics retailers, like Tweeter Home Entertainment and Harvey Electronics, that have filed for Chapter 11 bankruptcy protection in the past year?" asks Pallavi Gogoi in an article published by BusinessWeek.

The low stock price ($2) and market capitalization ($368 million) of the consumer electronics chain are signs that investors have little faith that the company will return to profitability or that, now that Blockbuster Entertainment has dropped out of the picture, anyone wants to buy it. Gogoi quotes Nick McCoy, senior consultant at TNS Retail Forward, a research firm: "Circuit City is in very serious trouble, and any scenario is possible today."

If a private equity player decides to buy Circuit City, the speculation is that the buyout might take place under a Chapter 11 reorganization plan. A bankruptcy restructuring would address a key problem that CEO Philip Schoonover has often alluded to: Many of the company’s 682 stores are in poor and underperforming locations, and would be expensive to close because they have long-term leases.

Section 363 of the U.S. bankruptcy code would allow Circuit City to sell assets and get out of leases and contractual obligations under the protection of the court. Says Rich Hynes, a bankruptcy law professor at the University of Virginia: "A 363 sale short-circuits the whole process, and the debtor can sell assets free and clear of any liens, and thus get a cleaner title.”

Despite massive losses and shrinking cash holdings, Circuit City is not considering a Chapter 11 filing. Said spokesman Bill Cimino: “We have adequate liquidity."

Management has made operational improvements, but the retail environment continues to worsen. Consumer spending is weak, prices have plummeted on flat-screen TVs, one of the company’s biggest money makers, and discounters like Costco and Wal-Mart have aggressively entered the consumer electronics market.

While Circuit City management might benefit from a bankruptcy reprieve, its shareholders would be less than thrilled to see their investment evaporate. As Gogoi notes, shareholder Mark Wattles, who owns 6.5 percent of the company and controls three seats on the board of directors, would not find a bankruptcy filing in his best interest. “It is rare that shareholders receive even a dime during a bankruptcy,” he quotes Hynes as saying.

In related Circuit City news, TradingMarket.com reports that the value of Blockbuster's debt has increased since the company abandoned the Circuit City takeover. States the article: "The company's 9% bonds due 2012 rose to 84.25 cents on the dollar on Monday, from 82 cents before the announcement. The cost to insure Blockbuster's debt with credit default swaps dipped to around 1,040 basis points, or $1.04 million per year for five years to insure $10 million in debt, from 1,094 basis points before the news."

Note: This post has been updated to reflect a correction in the original article in BusinessWeek.