Deb Shops Inc., saddled with debt and impacted by the weak economy, filed for Chapter 11 bankruptcy Sunday and said it has a deal for its senior lenders to acquire substantially all of its assets and to continue operations.

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The 325-unit juniors chain was acquired by Lee Equity Partners in July 2007 for $395 million.

“Today’s announcement is one of the final steps in the completion of the financial transformation and turnaround of Deb Shops,” said Mark Hoffman, Deb Shops’ chief executive officer. “The agreement dramatically reduces our debt levels and gives Deb Shops the financial flexibility for future investment in our stores and to continue to operate as one of the nationwide specialty retailers of trend-right fast fashion at affordable prices.”

Despite the bankruptcy Hoffman said that over the past year, the company has improved its customer experience and positioned itself for growth.

The transaction, which requires court approval, will be implemented through a filing with the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. Senior lenders led by Ableco Finance LLC have entered into a stalking horse agreement to acquire substantially all of the chain’s assets through a court-supervised auction. The transaction is expected to close in September. Lee Equity Partners LLC said it will receive an ownership stake in Deb Shops and continue to support the chain.

“The dramatic unexpected change in the economy beginning in 2008 made a financial restructuring of this kind critical,” Deb Shops said Sunday.

Deb Shops also said it will continue to pay vendors “in the ordinary course of business during this process and to continue payments and benefits on normal schedule” and that Hoffman will still lead the chain.

“In short, the company expects to continue business as usual throughout the process with no impact on associates, merchandise providers, customers or its business operations,” the company said.

“This is strictly a financial restructuring of Deb Shops’ business and we foresee no impact on our operations as we proceed through this process,” Hoffman said. “I am confident that the agreement announced today, combined with the substantial steps we have already taken to improve the customer experience over the past year, will position Deb Shops for a bright and prosperous future. Ableco Finance LLC and certain of our other senior lenders have committed to provide up to $21.7 million in financing to support Deb Shops’ business and liquidity needs during this process.”

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