Chapter 22: When Chapter 11 Isn't Enough

 Chapter 22: When Chapter 11 Isn’t Enough

Chapter 11 of the U.S. Bankruptcy Code provides a legal framework for businesses—and in some cases individuals—to reorganize their finances and continue operating while repaying creditors. Unlike Chapter 7 liquidation, which involves selling assets, Chapter 11 is designed for rehabilitation and a “fresh start.”

But in today’s environment, that first fresh start often isn’t enough. When companies return to court for a second restructuring, it’s jokingly referred to as “Chapter 22.”

Why Chapter 22 Is Rising

The prolonged high interest rate environment, combined with pandemic-era shifts in shopping and work patterns, has left many companies struggling. Retailers in particular were hit twice:

• First, as consumer traffic shifted online or out of urban centers.
• Second, as borrowing costs surged, making it harder to refinance debt.

The result? A wave of repeat bankruptcies.

• Claire’s has filed twice.
• Joann, Rite Aid, Forever 21, Party City, and Tuesday Morning have all made second trips through Chapter 11.
• Rue21 and Z Gallerie have filed three times.
• Bravo Brio Restaurants, Bar Louie, and Bertucci’s have also joined the list.

Some chains have shut down completely. Others have trimmed their store counts, renegotiated leases, or emerged under new owners.

Debt: The Double-Edged Sword

Debt has been one of the biggest killers. Low-interest debt after the financial crisis and into the pandemic allowed many struggling retailers to limp along. But when those debts matured in a world of 6–8% refinancing rates, the math no longer worked.

Even after shedding liabilities through bankruptcy, some retailers couldn’t fix the structural flaws in their businesses. Without addressing operations, supply chains, or consumer demand, another bankruptcy was almost inevitable.

What This Means for Commercial Real Estate

For property owners and investors, the ripple effects of retail Chapter 22s are significant:

• Lease Risk: Triple net lease (NNN) properties with tenants like CVS, Walgreens, and Rite Aid have hit the market with cap rates in the 7–9% range, signaling owner fears about closures.
• Vacancy Threats: When retailers fail, landlords are left scrambling to backfill space, often at lower rents.
• Opportunities: Not all locations close. Investors willing to research tenant financials and market fundamentals can find profitable leases—often with properties that survive reorganization and continue producing income.

The same patterns that started with bank closings have spread through pharmacies, restaurants, auto repair, beauty, and other main-street businesses. Owners who can separate distressed leases from durable ones may find bargains.

Looking Ahead

The lesson from Chapter 22 is simple: bankruptcy is not always a cure. For some companies, it’s only a pause button. But for savvy investors, these cycles create chances to buy strong locations at discounted prices.

🔑 Opportunity creates profits. The key is careful due diligence—knowing which tenants are likely to survive, and which properties will continue generating cash flow even if the name on the storefront changes.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

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