The Short Version

• Retailers and restaurants are increasingly turning to Chapter 11 bankruptcy protection as a strategic tool amid rising costs, margin pressures and shifting consumer behavior.
• U.S. corporate bankruptcy filings hit a 14-year high in 2024, with both national chains and smaller operators among those seeking court-supervised restructuring.
• Bankruptcy can offer advantages like lease termination and centralized debt negotiation, but it’s often costly, complex and best suited for large store portfolios.
• In some scenarios, out-of-court solutions are an option, though they require time-consuming negotiations with individual landlords and creditors.
• Vendors, employees and landlords can face significant disruptions when a retailer files, including tightened credit terms and increased turnover.
• Chapter 11 is not a cure-all; it requires that a company establishes a viable path forward, including operational changes, cost reductions and a sustainable business model.

High costs, tough competition and ongoing shifts in consumer behavior — it’s a formula prompting struggling retailers and restaurants to think about filing for Chapter 11 bankruptcy protection in hopes of either selling the business or restructuring it.

A Spike in Retail Bankruptcies: Who’s Filed?

Last year, U.S. corporate bankruptcy filings reached a 14-year high, according to S&P Global Market Intelligence. The 2024 tally included some big names that each were shouldering more than $1 billion in liabilities, such as Big Lots, Party City, Rite Aid, Red Lobster, Conn’s and Joann. So far this year, U.S. Chapter 11 filings have included At Home, Bertucci’s, Hooters, On the Border, Forever 21 and — once again — both Joann and Rite Aid. Venerable department store chain Hudson’s Bay Co. filed for Canada’s equivalent of Chapter 11 this past spring.

But questions related to business restructuring loom for lesser-known operators, as well, from mom-and-pop shops with just a few locations to regional franchisees that own dozens of restaurant outlets. “The last time I was this busy was during the 2008 crash,” noted Stephanie Lieb, co-leader of Trenam Law’s Bankruptcy and Creditors’ Rights practice group.

A board-certified business bankruptcy attorney, Lieb helps healthy companies pick up below-market leases out of bankruptcy court. She also dives into the balance sheets and business plans of distressed borrowers on behalf of landlords and lenders, giving her a window into the obstacles such tenants face. “Restaurants are mostly pretty thin-margin businesses,” Lieb noted. “Unless you are a bar selling liquor, which is higher margin, small increases in the price of tomatoes or eggs can have a big impact on your bottom line.”

Early Red Flags: When Retailers and Restaurants Start to Slip

Troubled retailers and restaurants tend to face daunting challenges by the time they reach out to turnaround and restructuring experts, noted MorrisAnderson principal and CEO Dan Dooley. Over the past five years, his consultancy has advised nearly 20 restaurant clients, primarily multiunit restaurant franchisees, in restructuring projects in and out of bankruptcy court. “Typically, they are falling behind on their required principal and interest payments to the bank, and so the bank is getting very concerned that it will not be able to collect on its loan,” Dooley said. “Secondarily, they’re really sticking it to their vendors; instead of paying them within 30 or 45 days, it has turned into 90 days.”

Those delayed payments can cause vendors to disrupt the flow of goods or services to the company. The downward spiral can accelerate if the cash-strapped operator neglects its stores. “That store was pretty nice when you redid it 10 years ago, but now it looks dumpy,” Dooley said. “People like to go to places that are nice and fresh.”

Bankruptcy vs. Out-of-Court Restructuring: What Retailers Must Consider

A key question is whether to handle the restructuring in bankruptcy or out of court. In Dooley’s view, the former often makes sense for those with large store portfolios. “The bankruptcy code gives you the ability to unilaterally terminate leases and incur a fairly minimal penalty,” he explained, “and the process is fairly simple.”

Out-of-court restructurings, by contrast, tend to require one-on-one lease renegotiations with each landlord of stores that are underperforming or paying too much rent, a potentially unwieldy and time-consuming effort across dozens or hundreds of locations. Dooley recounted one out-of-court restructuring in which an Applebee’s franchisee needed to shutter about 20 of its 120 restaurants. “We succeeded in negotiating out of every single one of those 20 leases, but that took nine months to accomplish.”

Outside of bankruptcy court, the Applebee’s franchisee paid the landlords of those 20 stores a per-location termination penalty of about six months of rent on average. Still, Dooley explained, this was lower than the $2 million or so in total legal and other costs that the company likely would have had to pay in Chapter 11. As portfolios get larger, however, the calculus can change to make filing more appealing. “Over the last couple of years, I have had large Burger King and Hardee’s deals where we needed to shut 40 or 50 stores,” Dooley said. “It would have been impossible to renegotiate that many individual leases out of court in a timely way.”

The dynamics help explain why Chapter 11 has been so common among huge chains like Party City, Rite Aid and Big Lots and among larger, multiunit restaurant franchisees. In other cases, Lieb added, debtors feel that taking the process into bankruptcy court can help level the playing field with their creditors. “They might feel they have no leverage or options and have to do whatever the lender asks for in that out-of-court workout,” she explained.

The Hidden Costs/Consequences of Chapter 11

None of this is to suggest that Chapter 11 is a panacea. “One of the most common misconceptions is that bankruptcy is going to solve all your problems,” Lieb said. “Bankruptcy moves or consolidates your problems into one place, the bankruptcy court, but you still have to come out of it with a plan and be able to prove that what you want to do is feasible.”

Obsolescent operators like Blockbuster Video, in other words, could not be saved merely by seeking court protection, Lieb said.

Bankruptcy also is expensive: In a typical Chapter 11 filing, the company needs to hire lawyers, financial advisers and, if a capital raise or sale are part of the plan, an investment banker. The committee of trade creditors, vendors, service suppliers and other stakeholders also will hire a lawyer and consultant. “So right away, you’ve got a lot of people trying to grab fees out of the estate,” Dooley said. For smaller companies, bankruptcy costs can run anywhere from $2 million to $5 million, he noted, and they can reach tens of millions or even hundreds of millions of dollars for the largest businesses.

Other negative effects also can follow a Chapter 11 filing. For example, designated “critical vendors” might drive harder bargains in new court-approved business agreements with the restructuring company. That could include insisting on cash payments or on being paid within 10 days rather than 60. Likewise, valued employees, now afraid for their jobs, might become more likely to quit or be poached, making it harder to pull off the restructuring. The bankruptcy process also can be logistically burdensome, Dooley said. “Bankruptcy creates all sorts of extra requirements on a company. It is not a fun thing to go through.”

As Lieb sees it, the analysis of whether a company should file for bankruptcy or pursue an out-of-court restructuring is case by case. “It depends on the facts, the balance sheet and the particulars of the business. It is critical to ask yourself if the problem can be fixed or if the current business model needs to be changed.”

The attorney said Chapter 11 can be a better option for debtors that are behind on payments to multiple creditors all at once, a list that could include not just landlords, banks and asset-based lenders but also employees, suppliers, insurance companies, utilities and various taxing authorities. “Anyone to whom you owe money is a creditor,” Lieb said.

On the other hand, if the debtor’s troubles are rooted in just one dimension of its business — a set of leases with above-market rents or a smattering of money-losing stores within an otherwise-healthy portfolio — an out-of-court restructuring could fit the bill.

How Distressed Retailers Can Cut Losses and Rebound

When advising distressed retailers and restaurants, Dooley starts by identifying which stores are losing money and by investigating “just what is going on within those four walls of those stores that are losing money.” Locations with unfixable flaws will need to be closed, he said. It is also important to scrutinize rental rates across the portfolio and look for opportunities to lower occupancy costs. “In the restaurant industry, generally speaking, rents should be somewhere in the range of 5% to 7% of sales,” Dooley said. “If they are much more than 8%, or maybe even double digits of the sales volume, the economics just do not work out.”

Renegotiating leases to achieve lower rents requires frank and sometimes difficult conversations with landlords. Troubled companies and their advisers need to be upfront about the possibility that the store might have to close if the landlord declines to provide rent relief, Dooley said. They could also point out that in a Chapter 11 bankruptcy, the landlord cannot count on receiving the termination fees that could otherwise have been negotiated in an out-of-court workout. “Maybe the landlord could lease that store to someone else, but at a minimum, they are going to be down for three or six months, maybe longer, while the store is being refurbed for the new tenant,” he said. “It is also not a given that the landlord will be able to get the same rent.”

His last step is to analyze and reduce prime costs like labor, merchandise and food, along with general administrative, marketing and other expenses. The aging of inputs and inventory is an important factor here: Clothes tend to lose value as seasons change or as they go out of style, and food perishes. “How you discount and move inventory that is not selling is critically important to cost- or margin-management,” Dooley said.

This playbook can turn troubled companies around, he said, but in severe cases success might hinge on the willingness of another party to recapitalize the business or of landlords or lenders to make significant concessions. In helping such creditors decide how to work with troubled operators, Lieb asks tough questions to make sure these businesses have a path forward. “Sometimes everything is going great and the owner, who is the heart and soul of that small business, gets sick,” she said. “If they get better or find someone else to take over, they can get back on track. I want to see a pro forma and what the next six months look like for that business in terms of profitability.”