msnbc.com news services
updated 8/26/2010 7:35:12 PM ET 2010-08-26T23:35:12

Blockbuster Inc. will file bankruptcy next month, people familiar with the matter have told the Los Angeles Times.

In a report on the Times website, the sources said the pre-planned Chapter 11 filing would be used to restructure a debt load of nearly $1 billion. A planned bankruptcy allows the debtor to work with creditors about payment terms ahead of the filing.

Sources said the bankruptcy would take five months. During that time, the company would be able to shed some costly leases of its worst-performing stores. The source said Blockbuster would close 500 to 800 outlets.

Movie studios, the Times reported, want the Dallas-based company to succeed so it can be a viable competitor to Netflix and Redbox.

Netflix's success already contributed to the downfall of video rental chain Movie Gallery, which filed for bankruptcy protection for the second time earlier this year. The company, which also owns Hollywood Video, is in the process of closing its remaining 1,050 stores.

Blockbuster also has been closing hundreds of unprofitable stores during the past two years. It still lost $65.4 million during the first three months of this year.

The Associated Press contributed to this report.

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