Restaurant operators have grappled with significant change in the past few years. The lingering impact of the COVID-19 pandemic, combined with a daunting collection of economic issues, including rapidly increasing labor costs, inflationary pressures, elevated interest rates, and changes in tariff policy have had a particular effect on the hospitality industry. For example, according to the June 2025 Producer Price Index, food costs have risen approximately twenty-one percent (21%) compared to the same month just four years ago. In the face of softening consumer demand due to reduced consumer buying power and soaring costs, restaurant operators have been forced to implement an array of strategies designed to cut costs and expand their potential market. While these strategies often allow restaurant brands to weather economic headwinds, sometimes a brand finds itself overexposed and ultimately insolvent. This can be problematic not only for restaurant operators but also for other interested parties such as lenders, vendors, and other suppliers.
As these recent headwinds continue to ripple through the market, bankruptcy has remained a common and effective tool to help restaurant brands manage their past liabilities, implement new go-forward strategies, and emerge as a stronger operating company on the other side. In just the past two years, several high-profile restaurant chains have utilized the bankruptcy process, including Red Lobster, On the Border, Bar Louie, Hooters, Bravo Brio Restaurant Group, Krystal, TGI Friday, BurgerFi, Buca di Beppo, Joe’s Crab Shack, and Ruby Tuesday. Some of these brands are already showing signs of positive turn around.
Contrary to popular belief, bankruptcy does not need to be the death knell of a company. When used effectively, it can often reposition a brand for future success in ways that are unavailable outside of bankruptcy. These strategies can be useful for companies and well positioned lenders alike. Some of the unique strategic advantages of bankruptcy include:
- Obtain Breathing Room From Creditors: Restaurant operators benefit from a pause in litigation and collection activities immediately upon the bankruptcy filing (i.e., the “automatic stay”). Oftentimes, those litigation and creditor claims become general unsecured claims that can be addressed at the tail end of the bankruptcy and do not present an obstacle to a restaurant’s reorganization.
- Rightsizing the Footprint: Restaurant operators can use bankruptcy to reorient and right-size their store footprint by closing and thereafter extinguishing their rental costs for unprofitable (or previously closed) locations. The Bankruptcy Code allows a restaurant to cancel lease obligations and substantially cap termination fees.
- Renegotiating Leases and Contracts: The ability of a restaurant to right-size its portfolio and leave vendor agreements behind provides the restaurant with leverage in negotiations with landlords and key vendors to obtain material concessions, such as reduced rental costs or extended trade credit. This leverage is particularly valuable where the restaurant wants to renegotiate rent for locations that are generally profitable but where the operator is paying above-market rent.
- Strategic Reductions in Force: Consistent with rightsizing the brand’s store footprint, restaurant operators oftentimes use the bankruptcy process to reduce the labor force while still complying with applicable law, including, for example, state and federal WARN Act laws.
- Changing Business Strategies: Restaurant operators can use bankruptcy as a tool to implement strategies that might otherwise be difficult outside of bankruptcy. For example, certain restaurant chains have recently used bankruptcy to change the mix of company-owned and franchise-owned locations. Bankruptcy also allows a restaurant operator to eliminate liabilities related to unprofitable business lines that the company wants to wind down.
- Reducing Debt Service: Restaurant operators oftentimes use bankruptcy to deal with significant senior debt. This can make the company more profitable upon exiting bankruptcy.
- Value-Maximizing Sale Process: Many restaurant bankruptcies provide an avenue for the restaurant operators to sell the restaurant brand as a going concern, free and clear of its liabilities (including any valid liens). By marketing the restaurant brand in bankruptcy, potential investors are attracted to buying a valuable brand (i) after it has been appropriately rightsized in the bankruptcy and (ii) without any of its previous liabilities. Moreover, bankruptcy provides an avenue to transfer permits and licenses, such as liquor licenses, in a faster and more efficient manner than would otherwise be available out of court.
While at first glance, bankruptcy can seem like a value-destructive action that spells doom for a business and its lenders alike. However, it can actually act as an effective tool to refresh a brand, promote future growth, and retain jobs for thousands of employees. Moreover, a bankruptcy can often provide a positive opportunity for a skilled investor. Next time you see a restaurant brand in bankruptcy, be sure to keep an eye out for a reinvigorated second act. Depending on one’s position with regard to a distressed restaurant business, it can often provide an opportunity. Interested parties should speak with an advisor and carefully consider their rights with regard to a distressed restaurant. Even vendors may be offered special protections in a bankruptcy process that are unique to the food industry. Understanding the bankruptcy process is key to maximizing value for all interested parties.
