Forever 21 Files Bankruptcy: What it Means for the Next Recession

October 4, 2019 by Alexa P. Stephenson, Esq.

Forever 21, the California-based retail chain that played a leading role in popularizing the modern fashion trend throughout the U.S. with its reasonably priced clothing and catchy storefronts, announced on Sunday evening that it would file for bankruptcy, signaling the diminishing viability of brick-and-mortar shopping malls and the fluctuating preferences of a new generation of consumers.

The private, family-held corporation extinguished long-circulating rumors regarding its restructuring attempts by stating that its Chapter 11 filing would effectively cease business in 40 countries, including the closure of 178 stores in the United States alone.  Forever 21’s internet-based retail platform will remain operational, as the company hopes to simplify their business model in an effort to return to the former success they once enjoyed. Part of Forever 21’s reorganization attempts will include renegotiation of the majority of its U.S. lease agreements.

The bankruptcy announcement is both a major stumbling block for a company that saw itself as a shining example of the proverbial American dream as well as a stark reminder of just how rapidly the retail industry is evolving due to technological advances and the rise of e-commerce.

In addition, Forever 21 is yet another in a long line of major retail stores that have filed for bankruptcy in the last year. Previous heavyweights, like Nine West, Toys R Us, Remington Outdoor, Brookstone, Sears, and David’s Bridal, closed a significant number of stores and sought protection in the bankruptcy court to reorganize their debts in the hopes of staying afloat in the rapidly-declining economy.  2018 was the fourth year in a row that American businesses filed bankruptcies in record-high numbers. 2019 looks like it is on track to beat this record as California has seen a 2.1% increase in bankruptcy filings just from 2018 to 2019. This, coupled with the fact that former leaders of their respective industries ­– Starbucks, Lowes, Subway, H&R Block, and Gap ­– collectively closed over 1,300 stores this year, points to the next economic downturn occurring in the near future.

It is no secret that filing bankruptcy is a tool in a borrower’s arsenal that borrowers do not hesitate to use to temporarily drag out or halt a foreclosure sale. A bankruptcy case has become an inevitable headache that nonconventional lenders will face between filing a Notice of Default and recording the trustee’s deed upon sale. While borrowers have a range of bankruptcy chapters to choose from, there has been an unprecedented increase in Chapter 11 filings, which require a more complex set of procedures for borrowers and creditors alike. As a result, secured lenders must deal with a longer and more expensive time period before they will be repaid in full.

As the economy continues to waver and borrowers continue to take advantage of the protections of the bankruptcy court, what can nonconventional lenders do to protect their rights under the note and deed of trust? The best option may seem counterintuitive: talk to an attorney. Why? Talking to an attorney will cost an exorbitant amount of fees, right? A lender only needs to consult with an attorney once the borrower files a lawsuit or bankruptcy, right? Wrong.

A good attorney can work with you from underwriting to foreclosure, and every point in between, to create a strategy specifically suited to your borrower to ensure you’re paid in full in the fastest and least expensive way possible. Often times, consulting with an attorney early will save you thousands of dollars and plenty of frustration in the future. For example, running background checks on your borrower during underwriting can show whether this particular individual or entity has filed bankruptcy or other lawsuits in the past, and therefore, will be more likely to do the same to avoid repaying you. In another case, if you’re certain your defaulting borrower will file a lawsuit against you, a forbearance agreement could be the best way to ensure a quick escape out of the inevitable — and expensive — superior court case.

As real estate prices continue to stagnate and, in some places, decline, relying solely on the LTV is no longer an option. The next recession is coming. It’s only a matter of when. Litigation mitigation is a necessary precaution for every lender who hopes to avoid bigger losses down the road. Those who fail to remember the mistakes of the 2008 recession are doomed to repeat them.

If you have questions about the best strategy for your borrower and to ensure you are paid in full on your loan, contact the Geraci Law Firm to work out a strategy now: 949-379-2600.

Image credit: The Somerset Collection