What does it mean when a store files for bankruptcy?

Preppy mass-market mall brand J.Crew filed for Chapter 11 bankruptcy protection on Monday, the first major retailer to file for bankruptcy as a result of the pandemic.

Along with hundreds of other brick-and-mortar businesses, J.Crew closed 500 stores in March and furloughed 11,000 employees as state governors issued orders to close nonessential businesses to curb coronavirus infection rates. It expects to lose $900 million in sales because of the store closures due to the coronavirus outbreak, according to a filing with the court by Michael Nicholson, the company’s chief operating officer.

But a bankruptcy filing doesn’t mean your favorite store is about to disappear. Instead, bankruptcy offers a company a way to reshape the business by reorganizing debt and eliminating costly real estate, said Kevin Carney, a former bankruptcy judge and partner with Hogan Lovells law firm.

In J.Crew’s case, it is using bankruptcy to give any debt holder a piece of its reorganized equity.

“They’re going to go into today with about $2 billion of debt and equity holders behind them,” said Fred Sosnick, a financial restructuring andinsolvency partner at Shearman and Sterling. “When they come out, the debt would be wiped out.”

Through the process of bankruptcy, companies also get the opportunity to reject or sell their leases, said Ken Rosen, a financial restructuring partner at Lowenstein Sandler. Some companies who declared bankruptcy before the pandemic were granted court approval to take a break from paying their rent, including Pier 1 Imports Inc., Modell’s Sporting Goods and casual-dining company CraftWorks Holdings. True Religion, which filed for bankruptcy in April, also received a rent break.

Some companies who declared bankruptcy before the pandemic were granted court approval to take a break from paying their rent.

“The retailer can say to the landlord, ‘I’ll turn back the property to you’ and the landlord has a claim and can assert that claim in bankruptcy,” said Rosen.

Some companies will try to attract new investors, but if they are unable to do that they may have no choice but to sell the business. Barneys New York, for example, entered bankruptcy and was sold for $270 million to Authentic Brands in November — which then closed all stores and kept the intellectual property.

One of the first requests a company submits to a court in bankruptcy is to honor gift cards as part of preserving the company’s usual customer practices.

Chinos Holdings, which runs 182 J. Crew stores, 140 Madewell stores, and 170 J. Crew Factory, said the restructuring won’t change much for shoppers. Its customer programs, including any loyalty programs, gift cards and returns and exchanges, will all operate as usual, the company said.

That store credit card bill also won’t disappear, said Rosen.

“Bankruptcy will give no relief to a consumer who owes money on a credit card,” he said.

The uncertainties surrounding the virus and the government’s economic response makes it difficult to estimate how many bankruptcy filings will result from the crisis and when they may happen. But with a growing number of people out of work, it is unlikely that retail will see a fast recovery.

“Consumers and businesses face growing financial challenges due to the pandemic, and bankruptcy provides a vital safe harbor from their mounting debts,” said Amy Quackenboss, the executive director of the American Bankruptcy Institute, a trade association of bankruptcy law professionals.

“We anticipate business filings to start rising this month and consumer filings to start to accelerate in early summer,” she said.

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