Kmart has become the largest US retailer to file for bankruptcy protection.
The move had been predicted by market-watchers as suppliers deserted the 105-year-old chain.
In its Chapter 11 filing, Kmart says its 2,100 stores will remain open while it restructures its business.
The company has struggled in the fiercely competitive discount market, and has seen the major credit rating agencies cut their ratings for its debt in recent weeks.
Kmart has faced stiff opposition from Wal-Mart and Target.
The company says it will reorganise on a fast-track basis, and it hopes to emerge from Chapter 11 in 2003.
Chief executive Mr Chuck Conway says: "We are determined to complete our reorganisation as quickly and smoothly as possible, while taking full advantage of this chance to make a fresh start and reposition Kmart for the future."
Kmart has secured £1.4 billion in debtor financing.
A Chapter 11 filing protects a company from its creditors while it reorganises and works out a plan to pay its debts.