Loss-making DVD rental chain Blockbuster filed for Chapter 11 bankruptcy protection in the US today, after being hammered by mail-order and online film rental services. But the 25-year-old company should swiftly re-emerge after a restructuring deal was agreed with creditors who include the billionaire veteran US investor Carl Icahn.

Icahn is among a number of bondholders who will swap debt for equity in a revamped company that should see borrowings slashed from $900m to little more than $100m (£64m). He owns about one third of Blockbuster’s senior loan notes, but stepped down as a director of the company six months ago to play a major role in restructuring talks.

Blockbuster’s “pre-arranged” bankruptcy protection move is designed to give it time to recapitalise its US operations and to focus on its online business, which is playing catch-up with rivals. Non-US subsidiaries, including the 600 UK shops, are not involved in the bankruptcy proceedings, but hundreds more American stores could now close – on top of the 500 that have shut in the last year.

The chain is creaking under the weight of its debts and has faced management upheaval in recent years. Its problems have been made worse by a growing number of vending machines that rent films for as little as a dollar a day, as well as an explosion in the number of consumers streaming movies online, either illegally or through legitimate sites such as Netflix and iTunes.

DVD and video stores appear as threatened as high-street music shops. Hollywood studios have also been suffering from the huge decline in the once-lucrative DVD sales market, which is down 40% from its historic peak. Founded in 1985, Blockbuster grew by leaps and bounds in its first decade, but was hit badly by the evolution of online technology and new DVD distribution channels, such as low-cost rental kiosks in US shopping malls.

Blockbuster was bought by US cable group Viacom for $8.4bn in 1994 and was subsequently floated on the New York stock exchange. The company has been steadily losing money and recently missed deadlines for interest repayments. When Blockbuster comes out of bankruptcy protection, it will invest in its online operations, and develop a kiosk-based rental service, going head-to-head with America’s Coinstar, which runs thousands of RedBox kiosks.

Martin Higgins, head of Blockbuster in the UK, recently said that the British business could find it difficult to buy DVD stock if the US parent went into Chapter 11 – which could affect the British chain’s ability to compete at Christmas. Higgins added: “We have contingency plans in place to ensure we don’t have difficulties paying people.”

But today a spokesman for Blockbuster in Britain said: “We are not affected by the US filing. The Blockbuster United Kingdom business is profitable, cash generative and has substantial net assets.” Blockbuster has roughly 3,500 remaining stores in the US, making it the country’s last major DVD franchise – rival chain Hollywood Video collapsed earlier this year.