New York CNN Business  — 

The next week could determine whether Sears, once the nation’s largest and most important retailer, lives or dies.

US Bankruptcy Court Judge Robert Drain began holding a hearing Monday on Sears’ plan to sell its assets, including 425 stores, to its chairman Eddie Lampert. It is the only chance to save the jobs of up to 45,000 employees of the Sears and Kmart chains and keep the 133-year old retailer in business.

Sears’ creditors, including vendors and landlords, oppose Lampert’s rescue bid, arguing that the company should be shut down and liquidated. More than 40 parties in the case have filed objections to the company’s planned sale, including the Pension Benefit Guaranty Corp., the federal watchdog that wants to take over the pension benefit payments owed 90,000 Sears retirees and other beneficiaries. Sears has objected to PBGC’s proposal.

The hearing is set to continue for at least two days. Drain has set aside most of the day Wednesday for a second day of the hearing and he and attorneys talked Monday about the likelihood that closing arguments won’t be heard until Thursday morning.

Drain could issue his ruling from the bench at the end of the process. Sears hopes to have a decision approving the sale by Friday February 8, and it hopes to close the sale by February 19.

Not all the objections filed in the case seek Sears’ liquidation. Most are arguing specific objections to one or more terms of the proposed sale. If Judge Drain agrees with some of the objections, it could kill the deal and leave no option but liquidation.

So far, the judge has appeared to be giving Sears every chance to save itself. At a January 18 hearing he said “it would be a very good thing” if there were a way to save the 45,000 jobs at Sears and Kmart. But those employees are not the top priority under the nation’s bankruptcy law.

Testimony during Monday’s hearing showed the deal almost didn’t come to fruition and that attorneys for Sears and attorneys for Lampert were not able to reach a deal by the original deadline of Jan. 14. Sears’ attorney met with Drain in chambers to indicate the company would have to proceed to liquidation, according to testimony and questions at Monday’s hearing. But Drain urged the parties to try again, even if it meant pushing past the original deadline.

“The judge felt we we close and we should take one more shot at closing the gap,” said William Transier, a member of the Sears board’s restructuring committee who testified Monday morning.

While Judge Drain has expressed a desire to save the company and the workers’ jobs, the final decision will ride on returning as much money as possible to those who are owed money from Sears. The committee of major creditors are owed more than $3 billion. They have argued repeatedly they don’t believe it makes sense to try to save Sears. They called the plan to stay in business “nothing more than wishful thinking ” and “an unjustified and foolhardy gamble with other people’s money,” in one of their filings.

Lampert’s filings have been similarly dismissive of the creditors’ positions, calling them “self-serving bombast” that would hurt other parties due to a “difficult to fathom set of narrow interests.”

Sears filed for bankruptcy on October 15. The company hoped to stay in business, but many retailers that have filed for bankruptcy with similar plans, such as Toys “R” Us, have been forced out of business by their creditors.

Then, even if Sears emerges from bankruptcy, it might not survive long-term. Recent history is marked by chains that closed for good after second bankruptcies – Gymboree and RadioShack, for example.

Lampert says he believes a smaller Sears, limited to its most profitable stores and free of unaffordable levels of debt, can be a competitive and profitable retailer long term. He is seeking to buy Sears through his hedge fund, offering $5.2 billion for Sears’ assets. But he is putting up a relatively limited amount of additional cash, only $1.4 billion, most of which comes from new loans that the reborn Sears would borrow against in future earnings. His biggest contribution to the deal is an offer to forgive about $1.3 billion of the roughly $2.4 billion he is owed by Sears.

Creditors argue the court should not allow that debt to be used in the deal, saying the loans Lampert’s hedge fund made to Sears were not in the company’s best interest and were also a conflict of interest since he was in control of the company at the time. Lampert has argued the loans were completely proper and done in an effort to keep a struggling Sears afloat in recent years.

If the deal is approved, the new Sears will be a shell of its former self. There were 3,500 stores and more than 300,000 employees in 2005 when Sears and Kmart merged. A series of store closings and losses have left a much smaller company.

During the middle of the 20th century, Sears was the country’s largest, most powerful retailer and its largest employer. It was both the Amazon (AMZN) and the Walmart (WMT) of its time.

Its catalog business, which dated back to the late 19th Century, introduced many American homes to mass produced goods. Its stores anchored malls that led to the suburbanization of post-World War II America. Its dominant appliance business introduced labor saving devices into homes, reshaping family dynamics. Sears truly changed America.

But long before Americans started shifting to online shopping, Sears was losing to big box retailers such as Walmart and Home Depot (HD) that offered better selection and lower prices. It was already in trouble when Lampert merged Sears and Kmart in 2005 to form Sears Holdings. It has not posted an annual profit since 2010, and has run up $12 billion in losses since then.

Still,only a year ago, it had about 1,000 stores with both brands in virtually every state. If the company survives this process, it will have 425 stores left mostly in California, Texas, Florida, the Northeast and Mid-Atlantic, areas where the real estate under the stores has higher value. A wide swath of middle America will have few if any Sears or Kmart stores.