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What does it mean when a store files for bankruptcy protection?

For a start, it doesn't mean you're off the hook for that store card bill.
One of the first requests a company submits to a court in Chapter 11 bankruptcy is to honor gift cards as part of preserving the company's usual customer practices.Mark Felix / AFP - Getty Images

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

Along with hundreds of other brick-and-mortar businesses, J.Crew closed numerous stores in March — 500, in its case — 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 closings, according to a filing in U.S. Bankruptcy Court in Richmond, Virginia, by Michael Nicholson, the company's chief operating officer.

A Chapter 11 filing is different from a filing under Chapter 7 of the U.S. Bankruptcy Code. Under Chapter 7, a company loses control of the business, some or all of which can be sold off by a third-party trustee to meet the company's debts.

A Chapter 11 filing doesn't mean your favorite store is about to disappear. Instead, Chapter 11 offers a company a way to reshape the business by reorganizing debt and eliminating costly real estate, said Kevin Carey, a former bankruptcy judge and partner with the Hogan Lovells law firm.

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In J.Crew's case, it is using the bankruptcy process 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, partner and head of the financial restructuring and insolvency practice at Shearman & Sterling. "When they come out, the debt would be wiped out."

Through Chapter 11, companies also get the opportunity to reject or sell their leases, said Ken Rosen, a financial restructuring partner at Lowenstein Sandler. Some companies that sought bankruptcy protection 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 the casual-dining company CraftWorks Holdings. True Religion, which filed for bankruptcy protection last month, also got a rent break.

Some companies who sought bankruptcy protection 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," Rosen said.

Some companies will try to attract new investors, but if they are unable to do so, 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 is to honor gift cards as part of preserving its usual customer practices.

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

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

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

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The uncertainties surrounding the virus and the government's economic response make 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's 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, 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.