Retail bankruptcies subside, but will return with a vengeance in Q1 2021

Al Urbanski
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modells store
Clearance sales are running at all Modell's stores as the 130-year-old chain goes out of business.

Retailers whose businesses have been devastated by the pandemic but who have enough cash on hand to remain in operation through the holidays will do so. But bankruptcy lawyers expect the pace of their Chapter 11 filings on behalf of store chains to quicken come January.

“I don’t think we’d have seen this many bankruptcy filings if COVID-19 didn’t happen, but many of them happened at companies like J.C. Penney that people have been expecting to go under for years,” said attorney Glenn Rose of the Nashville-based firm Bass, Berry & Simms.

More than a few of the filings occurred because of the changing nature of the retail business, he said. Retail chain founders who’d risk everything to save the family business have been replaced by private equity firms that enter Chapter 11 to gain the most leverage from the situation.

J. Crew is a classic example of this. The private equity company is throwing in the towel and saying, ‘We got the most we could out of this. We can’t salvage it. Our only option is to file a bankruptcy,'” Rose said.

Stephanie Lieb, an attorney at Trenam Law in Tampa, said she saw a decrease in her Chapter 11 cases this year.

“I thought there would be a lot more a lot more bankruptcies, but there really aren’t,” she said. “Government assistance programs were so strong that retailers got PPP money and hung in. Forbearance agreements with landlords and banks also really intensified.”

After filing Chapter 11, companies are protected from paying what they owe, but are required to pay all current bills during the pending proceeding. Government subsidies have helped lots of retailers—even small local ones—keep paying all their bills and stay alive into the holiday season.

“We won’t see any bankruptcy filings in the fourth quarter, but the first quarter of 2021 will be very busy.” Rose said. “Retailers generally file after the holiday season when they don’t see a lot of options.”