Sears, the 125-year-old US department store chain that was once the biggest retailer in the world, has filed for bankruptcy after years of losses and mounting competition from online rivals such as Amazon.

The company, which owns the discount chain Kmart, has filed for chapter 11 bankruptcy in New York as it struggles with a debt burden of $5.6bn (£4.3bn) and was unable to make a $134m repayment due on Monday. The move will give Sears time to reorganise its debts and allow it to keep most of its stores open through the holidays, in a bid to avoid outright liquidation.

It will receive $300m from its lenders and is negotiating a further $300m injection from a hedge fund owned by the company’s chairman and biggest shareholder and creditor, Eddie Lampert.

Beaten by Amazon and Walmart, Sears faces the end after 125 years Read more

The company, which has about 700 stores, will shut a further 142 by the end of the year, with liquidation sales expected to start shortly, following 46 recently announced store closures. The Sears workforce has dwindled to about 70,000 from 300,000 a decade ago as the firm closed more than 1,000 stores.

Once a symbol of the American lifestyle that prided itself on selling everything to everyone, Sears has been losing out to rival retailers Walmart and Amazon.

Since it merged with Kmart in 2005, the company has been run by the billionaire hedge fund manager Lampert, who sold off many of the firm’s brands and properties but failed to win back customers, many of whom now prefer to shop online. Lampert stepped down as chief executive on Monday but remains chairman.

Lampert’s hedge fund is considering buying a “large portion” of the Sears stores out of bankruptcy, the company said. Lampert believes the company can reorganise about 300 of the most profitable stores, according to the Wall Street Journal.

“The company believes that a successful reorganisation will save the company and the jobs of tens of thousands of store associates,” Sears said.

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For generations, Sears served working-class homeowners hoping to buy high-quality products by offering them monthly instalment programmes. It started out as a vast mail-order business selling clothes, tools, toys and even tombstones, cocaine and opium, and became the biggest retailer in the US before being overtaken by Walmart in the 1980s, and later Amazon.

Neil Saunders, the managing director of the research firm GlobalData Retail, pointed to “management’s failure to understand retail and evolve Sears in a way that would have given the chain a fair chance of survival”.

He added: “Although the present leadership team needs to shoulder much of the responsibility, the missteps arguably go back to the 1980s when Sears became too diversified and lost the deftness that had once made it the world’s largest and most innovative retailer.”