I followed the instructions for a sphag'n'bags for my phal, and I'm still seeing loss of roots during this process. Roots that were healthy and firm when I trimmed have now rotted back so it's all mushy except for the hard string in the middle.
Welcome to OB! Unfortunately this is not normal, I fear you lost most or all the roots. Personally I have not had any luck with this method, I lost the phal I was trying to save. I did have luck with planting a phal with few leaves in an oncidium medium (smaller than phal medium) that I soaked for at least a day. I also had good luck with a rootless phal in sphag but care must be taken not to overwater. I put packaging popcorn at the bottom of a small pot then planted the phal in the sphag--I water when the top is a little crusty and I fluff the moss to make sure it isn't compacted. In both cases I use KLN when I water. Both phals are now growing roots. Some folks have good luck with s/h. In any case I would clean the phal with peroxide or physan 20 to try and stop the rot. I am also trying to stay away from box store purchases which is why I had a problem with root rot to begin with. Good luck!
I would usualy say to reserve Sphag-n-Bag for orchids without any roots left at all. I successfully got one to start roots using it and then potted it again. Another that had just a couple of small roots left I just potted up small and it eventually got going again.
It might be worth using H202 to try and stop the rot.
Then I'm not sure... I know some people get problems with mold/fungas/rot using Sphag-n-bag. The problem is that trying to keep the plant humid also encourages those sorts of things.
Another method of getting rootless phals to root is 'water culture'. I tried it, but I got rot with that as well