Faced with a $134 million scheduled debt repayment, Sears Holdings (NASDAQ:SHLDQ) filed for bankruptcy early on Monday morning. In recent weeks, Sears Chairman Eddie Lampert had desperately tried to negotiate an out-of-court debt restructuring for the company; unsurprisingly, those efforts failed.

At least one thing won't change about Sears Holdings now that it has filed for bankruptcy: It will continue to close stores at a rapid pace. On the bright side, the company wasn't forced to liquidate immediately -- which was a possibility just a few days ago. Here's what's next for the storied American retailer.

A management shakeup

The most surprising part of Sears Holdings' bankruptcy announcement is that Lampert stepped down from the CEO position effective immediately. He remains intimately involved in the company, though. Aside from retaining the chairman title, Lampert is also the top shareholder and top lender to the company through his ESL Investments hedge fund.

For now, Sears Holdings will be led by an "Office of the CEO" consisting of CFO Robert Riecker, chief digital officer Leena Munjal, and president of apparel and footwear Gregory Ladley. The company also appointed Mohsin Meghji as its chief restructuring officer. Meghji is a managing director at M-III Partners, a firm that has been advising Sears Holdings on its restructuring efforts for the past month or so.

The exterior of a Sears full-line store

Sears Holdings filed for bankruptcy on Monday morning. Image source: Sears Holdings.

Meanwhile, Sears Holdings has added much-needed restructuring expertise to its board with two new appointments this month. New board members Alan Carr and William Transier make up half of the board's recently formed restructuring committee.

Another round of store closures

Sears Holdings slashed its store count from 1,430 to 1,002 during fiscal 2017, and it's closed (or announced plans to close) about 300 more stores since the beginning of 2018. However, while there's a chance that Sears could survive in some form following its bankruptcy filing, it will have to shrink even more to make that possible.

In a notice filed with the bankruptcy court on Monday, Sears Holdings said it plans to begin liquidating another 142 stores immediately, consisting of 65 Kmarts and 77 Sears locations. This will shrink each chain's store footprint to fewer than 300 locations. The liquidation sales are a prelude to rejecting the leases for these stores, which will allow Sears Holdings to stop paying rent for money-losing locations.

Of the roughly 550 locations that will remain after the current round of store closures, Sears Holdings believes that 300 are viable as is. The other 250 are being evaluated. Some of those stores could survive if landlords provide rent concessions, or could be downsized to a more appropriate amount of space. However, many of them are likely to be closed in 2019.

Liquidation is still the most likely endgame

Just because Sears Holdings says it plans to restructure -- and that it has 300 solidly profitable stores -- doesn't mean the company will be able to emerge from bankruptcy. Just in the past year, two major retailers that filed Chapter 11 reorganization cases (Bon-Ton and Toys R Us) ultimately were forced to liquidate.

Part of the problem is that bankruptcy filings tend to spook customers. Bon-Ton and Toys R Us had dreadful 2017 holiday seasons, even as many other retailers experienced a big improvement in their sales and profitability trends. The sales downturns undermined both chains' plans to emerge from bankruptcy as viable businesses.

Sears Holdings could have even more trouble trying to restructure than Bon-Ton and Toys R Us. The latter two companies weren't very far from breakeven free cash flow; they were forced into filing for bankruptcy because they had too much debt. By contrast, Sears has been burning well over $1 billion of cash every year, even without counting interest payments.

In other words, Sears Holdings faces a steep climb to remake itself as a viable business, even without the likely sales hit from having filed for bankruptcy. Now that a bankruptcy court judge is the ultimate arbiter of the company's fate, Sears doesn't have much time to show that it can reorganize successfully; the chances of creating a viable plan over the next few months are slim indeed. This could lead to a complete liquidation of Sears Holdings during 2019.

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