After emerging from a court-supervised Chapter 11 restructuring, there is no guarantee that a company will not return to the bankruptcy court seeking further Chapter 11 protection.
The so-called “Chapter 22” filings — industry slang for a second Chapter 11 filing by a company — occur with some degree of regularity every year, but over the past few years, their frequency has increased. To some, Chapter 22s are considered a blemish on the bankruptcy system. It means that the first bankruptcy failed and the company was unable to emerge as a successful, functioning company, likely because it sped through the original Chapter 11, restructuring only their balance sheet and not addressing the operational or systemic problems facing the company.
To others, Chapter 22 filings are considered a second opportunity for a struggling company to maximize value for its stakeholders, fix operational issues, and save jobs. It can also prevent a Chapter 7 liquidation and hopefully preserve the enterprise for future generations.
The Chapter 22 company could have miscalculated the effects of the balance sheet restructuring in the first bankruptcy, or failed to consider certain headwinds and operational challenges that arose subsequent to confirmation.
Chapter 22 gives the company the opportunity to save the business, preserve jobs. and maximize value. With the gift of hindsight, hopefully a debtor in Chapter 22 will approach the process more pragmatically and use their second bite at the apple to achieve more long-lasting positive results.
If a company intends to reorganize and emerge from the second bankruptcy as a viable company, a Chapter 22, like a Chapter 11, is an expensive and time-consuming process. A Chapter 22 also requires the approval of creditors, who may be less amenable the second time around, having been potentially burned in the first bankruptcy. If it appears that the circumstances have not changed significantly between the two bankruptcies, creditors may be more confrontational and less cooperative with the debtors in the second bankruptcy.
Even after convincing creditors to accept a second plan of reorganization, the Chapter 22 debtor must convince a court that their second plan of reorganization is “feasible,” that is, unlikely to be “followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan.” The bankruptcy court will be skeptical that the debtor can make this showing considering that the debtor had tried to accomplish this in the first bankruptcy but failed.
A Chapter 22 is also frequently used to liquidate a company's assets, cease operations and/or seek a sale to a strategic buyer. In this scenario, the debtor and its major constituents recognize that the company is no longer viable and needs to either wind down operations or combine with another well-run operation.
Retailers, especially those concentrated in brick-and-mortar stores, have been especially susceptible to multiple bankruptcy filings. The rise in retail Chapter 22s correlates with the general rise in retail bankruptcies, but it is also a result of industry headwinds, failure to successfully rebalance the company's balance sheet, and operational problems. For retailers, which already operate with thin margins, unforeseen market changes can send otherwise healthy companies toppling towards bankruptcy.
During the past several years, retailers such as Party City, David's Bridal, Payless, Tuesday Morning, Fairway and Gymboree have all turned to the bankruptcy courts at least twice in an effort to either save their businesses or liquidate. For retailers, the potential damage to the brand and relationships with vendors may also impact the likelihood of a return to Chapter 11.
For example, fabric retailer Joann Inc. filed for bankruptcy for the second time in less than a year in January 2025, after implementation of a prepackaged plan, which failed due to unanticipated inflation, higher interest rates, and decreased consumer discretionary spending.
In addition, Joann pointed to decreased production from key vendors, who failed to ship on terms commensurate with pre-bankruptcy levels. The lasting result of Joann's first bankruptcy made it impossible for Joann to properly stock its stores to effectuate a long-lasting turnaround of its business.
Most recently, Forever 21 filed a Chapter 22, its second bankruptcy in six years. As a result of its first bankruptcy in 2019, Forever 21 was acquired by a consortium of parties including Authentic Brands Group, and two of its landlords, Simon Property Group and Brookfield Property Partners. Forever 21 blames its second bankruptcy on “operational obstacles and industry changes.”
Specifically, Forever 21 points to historic inflationary pressures and a highly competitive retail environment, especially competition with online retailers like Shein and Temu, who sell inexpensive goods in the U.S. from overseas, and who are able to take advantage of the “de minimus exception,” which exempts goods valued under $800 from import duties and taxes. Companies like Forever 21, who pay duties and tariffs on goods stocked in their stores and warehouses, are therefore undercut by overseas “e-tailers,” who do not pay such duties and tariffs and can pass the savings along to consumers.
Unless a change is made to the “de minimus exception,” it is likely that U.S. based brick-and-mortar retailers will continue to face pressures from overseas sellers taking advantage of the exemption 1 . Forever 21 intends to wind down their brick-and-mortar retail locations in the United States, while continuing to market their business or a subset of their business on a going concern basis.
Some argue that the prevalence of Chapter 22s means that bankruptcy courts should be stricter on large companies exiting bankruptcy and take a closer look at the company's projections and assumptions in order to avoid a situation where a debtor returns to the bankruptcy mere years (or even months) later.
Whether repeat filings are a result of, perhaps, the bankruptcy court being too gentle on corporate debtors, or whether they are necessary components of a business-friendly bankruptcy scheme, the only thing worse than one bankruptcy is two.
Originally published by Chain Store Age.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
