As retailers including J. Crew and Neiman Marcus file for bankruptcy, experts worry about skittish creditors and an overloaded bankruptcy court system

• J. Crew and Neiman Marcus have filed for Chapter 11 bankruptcy, and retail industry experts say that more could be on the way.
• But as many stores remain closed across the US, it has become "just about impossible" to predict how retailers' businesses will fare in the coming months, bankruptcy experts say.
• One expert said this could make creditors more hesitant to work with certain retailers through the bankruptcy process.
• Visit Business Insider's homepage for more stories.

J. Crew and Neiman Marcus are among the first major retailers to file for bankruptcy as the coronavirus pandemic further disrupts an industry that was already having its fair share of struggles. Others are expected to follow suit, with JCPenney seeming a likely candidate as it reportedly postpones a major debt payment.

Filing for Chapter 11 bankruptcy protection gives distressed companies a chance to reorganize and get a fresh start.

But retail companies going through bankruptcy proceedings right now are facing a set of difficulties that wouldn't be happening if not for the pandemic. Being unable to predict stores' future sales is a major challenge, as is not having a way to hold going-out-of-business sales while locations remain closed in certain states.

Some experts are also starting to worry about what could happen if too many companies end up filing for bankruptcy protection at once.

Stores' uncertain future in the United States

Companies filing for Chapter 11 bankruptcy protection are seeking a reorganization of the business using debtor-in-possession financing. Retailers might propose measures like ending unprofitable store leases as part of their plan to move forward.

But, the very nature of the pandemic and varied responses from states could make it nearly impossible for businesses to predict their future. This unpredictability complicates retailers' plans to emerge from bankruptcy.

"They have to be able to project their revenue in a way to show the creditors who vote on the plan that they are better off having the debtor continue in business and voting in favor of whatever proposal the debtor is going to make, rather than having the debtor liquidated and shut down," Fred Ringel, partner at the law firm Robinson Brog, told Business Insider.

Ringel is representing several different landlords in the J. Crew bankruptcy case.

He added: "It's difficult for them to project the revenue on a going-forward basis because of the fact that while some states are now starting to open up, it's still a question as to whether people are going to have the money to be spending, and how they're going to come back, and what that's going to look like."

Nick Tsafos, partner-in-charge of New York at accounting firm EisnerAmper, agreed that making these kinds of predictions about future cash flows is "just about impossible."

"Before the pandemic, you're able to look at trends in the economy and consumer spending and develop projections based on that," he said, adding that the uncertainty around the virus' spread and when local governments will allow businesses to reopen has thrown a wrench in those projections.

According to Song Ma, an assistant professor of finance at Yale School of Management, this uncertainty could make creditors more hesitant to work with companies through the bankruptcy proceedings.

An added complication, Ringel said, is that retailers don't have a reliable way to liquidate assets should they need to, given that many stores remain closed under certain states' ongoing restrictions. They can't run going-out-of-business sales if stores are still closed.

Several retailers that filed for bankruptcy before the pandemic hit — Modell's and Pier 1 Imports, for example — filed motions to "mothball," or suspend, Chapter 11 proceedings to give themselves more time to pay landlords, vendors, and other lenders while they are unable to hold liquidation sales due to restrictions.

An avalanche of bankruptcies could be on the way

Experts are also starting to worry about a potential overload of the bankruptcy court system as both corporations and individuals could file at a higher rate over the coming months.

Ma says this could cause judges to rush through cases more quickly than would be ideal for those involved. There could also be a delay as judges' schedules get packed with hearings.

"It seems that it's going to be particularly bad because those are the people who really want to kind of get out [of bankruptcy] and hope the bankruptcy system helps them get a fresh start," he told Business Insider.

Ben Iverson, a professor at Brigham Young University, and Mark Roe, a professor at Harvard Law School, argued in an op-ed on Project Syndicate that the bankruptcy court system should immediately work to expand its capacity to hear cases in order to avoid these issues.

"For starters, special procedures are needed for bankrupts to pay critical suppliers and sometimes employees. If courts are backed up, these payments will be delayed, causing disruptions to ripple throughout supply chains," they wrote.

They continued: "Furthermore, some bankruptcy decisions must be made almost immediately so that businesses can get and keep enough cash to stay alive through their next payroll."

The authors pointed out that bankruptcy filings typically surge several months after unemployment filings start to grow at an exponential rate.

More than 30 million Americans filed for unemployment in the six-week period ending May 2.