Movie Gallery Inc. (NDAQ:MOVI) shares plummeted today after the rental chain finally declared bankruptcy just two and a half years after winning a takeover battle for a major rival. The news comes as no big surprise to shareholders who saw warning signs back in late June.

Movie Gallery filed for Chapter 11 bankruptcy today in hopes that it can slash its debt by $400 million and reorganize itself into a new public entity. The chain still operates nearly 4,500 stores after it acquired Hollywood Video in April 2005 for $1.25 billion and the assumption of $350 million in debt.

Many analysts remain skeptical as to whether or not the company can emerge from bankruptcy and remain a viable competitor in the increasingly difficult rental space. Tight competition from satellite and cable providers along with online rental services like Netflix and Blockbuster's new service. However, Movie Gallery did unveil plans in March to enter the online business.

Movie Gallery also has a lot of restructuring ahead of itself before it can go through with the Chapter 11 process. The company said it would close nearly 520 rental stores two weeks after it said it would miss interest payments on second-lien debt and 9.625% senior notes.

"Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through closing unprofitable stores, headcount reductions and other means, these actions were not sufficient to offset the significant shift in our business and the cost of our substantial debt obligations," said chief executive Joe Malugen.

In the end, common stock shareholders will likely end up losing all of their investment as shares in the new company will be distributed to creditors. However, the new public entity may be a good investment opportunity if it is priced correctly. Usually, creditors will begin selling their stock immediately and create a discount. Combined, these factors make MOVI a stock worth watching!

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