What Is Chapter 11 Bankruptcy? True Religion Files For Creditor Protection

Premium jeans retailer and designer True Religion Apparel Inc. said Wednesday it filed for creditor protection and reorganization under Chapter 11 bankruptcy protection in a federal court in Delaware. The pricey jeans manufacturer joined several other retailers — Aeropostale and American Apparel — that have been unable to adapt to the large scale industrywide shift to online sales. True Religion also admitted their denims have slowly fallen out of style due to the rise of athletics wear.

The company said it won support from the majority of its top-tier secured creditors. Its owner TowerBrook Capital Partners has also reached a proposed deal with the lenders in a bid to cut the retailer’s debt by about three-quarters as it continues to operate, the Los Angeles Times reported.

“After a careful review, we are taking an important step to reduce our debt, reinvigorate True Religion’s iconic brand and position the company for future growth and success,” True Religion CEO John Ermatinger said in a statement, a report published Wednesday by the USA Today said.

Read: Aéropostale (AROP) Files For Chapter 11 Bankruptcy Protection

Chapter 11, also frequently referred as the “reorganization chapter” of the bankruptcy code, permits a debtor to propose a plan of reorganization to keep their failing business alive and pay creditors over a period of time. According to the bankruptcy law, filing a Chapter 11 petition grants “a debtor what is known as an automatic stay from the enforcement actions of creditors. This precludes creditors from continuing collection efforts, from bringing a lawsuit, or from filing liens against property or foreclosing on property.”

A Chapter 11 debtor is allowed to file a plan of reorganization for a time period of 120 days and solicit the plan for a period of 180 days. A debtor is permitted to seek an extension to the time period for a legitimate cause recognized by the court; or else if the given time period lapses, any creditor or party in interest can structure a plan for the debtor. It is mostly used by businesses, but it can also be used by individuals, who have an income greater than what is allowed by the Chapter 7 means tests.

The means test is conducted to check if the individual has the “means to pay” for at least some of their debts before they are officially discharged into bankruptcy. Individuals also benefit from Chapter 11 as they are permitted to keep assets beyond the “statutory exemptions available under Chapter 7 and Chapter 13.”

Read: US Retailer Sports Authority Files For Bankruptcy Under Chapter 11

TowerBrook Capital Partners, the Manhattan Beach-based firm and owner of True Religion, employs nearly 1,900 people and sells its jeans and other clothing apparel through 140 stores along with the True Religion and Last Stitch brand names.

Founded in 2002, True Religion was publicly held until it became a private entity in 2013 after being acquired by TowerBrook for $835 million. In 2013, the retailer, however, “began experiencing declining sales caused by the general trend of consumers [moving] away from traditional retail to online shopping,” Dalibor Snyder, True Religion’s Chief Financial Officer, said in the court filing in the federal court in Delaware, where the company filed the Chapter 11 petition Wednesday, the LA Times reported. The retailer had to shut 20 of its stores to cut down on the costs in 2016.

The reorganization plan and the proposed deal with lenders will cut down the company’s debt by an amount over $350 million, according to its statement, Fortune reported.