Less than two weeks ago, shares of Movie Gallery Inc. (NASDAQ: MOVI) surged increasingly than 17% on news that the company was closing 13% of its stores. On Monday, the stock is set to tank on reports that the company is on the verge of filing for bankruptcy protection in a prepackaged deal that would exchange its debt obligations for fairness.

According to The Wall Street Journal (subscription required), “The Dothan, Ala., company will file for bankruptcy that month and hopes to emerge from Chapter 11 in early 2008, according to society with direct knowledge of film Gallery’s

plans. They spoke on condition that they not be identified.”

The company is burdened with a massive debt load, much of it the conclusion of its ill-conceived $1 billion acquisition of Hollywood Video in 2005. Interestingly, film Gallery outbid Blockbuster Inc. (NYSE: BBI) for that prize: File that one under Pyrrhic victory.

Brick-and-mortar film rental outlets have struggled with competition from services like Netflix Inc. (NASDAQ: NFLX) and Blockbuster’s Total Access program.

Original post by Zac Bissonnette

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