Prepackaged Bankruptcy

What Is Prepackaged Bankruptcy?

A prepackaged bankruptcy is a plan for financial reorganization that a company prepares in cooperation with its creditors that will produce results once the company enters Chapter 11. The aim of a prepackaged bankruptcy — which must be decided on by shareholders before the company records its petition for bankruptcy — is to save expenses and abbreviate the turnaround time to rise up out of bankruptcy.

How Prepackaged Bankruptcy Works

The thought behind a prepackaged bankruptcy plan is to abbreviate and work on the bankruptcy cycle to set aside the company cash in legal and accounting fees, as well as the amount of time spent in bankruptcy protection. A proactive company in distress will tell its creditors that wish to arrange terms of bankruptcy before it records for protection in court.

These creditors — loan specialists, inventory providers, service suppliers — normally could do without the distressed situation of the company, yet will work with it to limit time and expenses associated with bankruptcy reorganizations. Creditors are bound to be managable during the exchanges to modify terms since they will have a voice before the bankruptcy filing. The alternative would be a surprise and afterward a scramble to deal with the delinquent debtor with more vulnerability about what amount of time the cycle will require.

A company and its creditors can expect a resolution inside a lot more limited time span under a prepackaged bankruptcy than a conventional one. Three to nine months is commonplace. The sooner the company can rise out of bankruptcy, the sooner it can carry out its reorganization trying to return to solid business operations.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, endorsed into law March 27, 2020, raised the Chapter 11 subchapter V debt limit, which was intended to make bankruptcy simpler for small businesses. The limit was raised to $7.5 million from $2.7 million, applies to insolvencies recorded after the CARES Act was enacted, and nightfalls one year after the fact.

Advantages and Disadvantages of Prepackaged Bankruptcy

As referenced over, the advantages incorporate saving expenses and time. The most common way of entering and leaving Chapter 11 is smoother, with creditors ready for a reorganization plan beforehand. Moreover, the company can keep away from a portion of the negative exposure that outcomes from a longer long bankruptcy process including creditors fighting for their claims.

A prepackaged bankruptcy has a major risk, nonetheless. Assuming that a creditor realizes that a bankruptcy filing is impending, it might take an aggressive position in gathering from the company before the Chapter 11 filing. This might disturb the planned cooperative nature of prepackaged bankruptcy exchanges. Others might follow suit, causing more financial stress on the company.

66%

The number of shareholders expected to endorse a prepackaged bankruptcy plan before it very well may be carried out.

Real World Examples of Prepackaged Bankruptcies

Retailers Neiman Marcus and J. Group petitioned for Chapter 11 bankruptcy protection with prepackaged plans in May 2020, following the lockdown during the economic crisis. Both were at that point burdened with major debt from leveraged buyouts before the lockdown hit and exacerbated the situation. Each keeps on working while prepackaged plans are executed to reduce their debt burden.

Features

• A prepackaged bankruptcy is a strategy to rise up out of bankruptcy by haggling with creditors in advance of Chapter 11 procedures.
• The goal of such a plan — which must be approved by shareholders and a court — is to speed up the overall time a company is under bankruptcy protection.
• A few creditors, in any case, may exploit being cautioned of an unavoidable bankruptcy and become uncooperative, sabotaging the goal of being prepackaged.