What is a Prepackaged Bankruptcy?
The Problem: Chapter 11 Proceedings can be a strain on business
Although Chapter 11 is a last resort for businesses, it can be extremely effective in solving business problems. However, navigating through an extended Chapter 11 Business Bankruptcy reorganization can be expensive and invasive for a company. Management unfamiliar with how the process works can easily become overwhelmed by the intrusive nature of the process and the sheer number of advisors and attorneys involved. The length and costly nature of Chapter 11 reorganization can put significant strains on a company and its stakeholders. One option that may be available to address these challenges is to accelerate the in-court proceedings by filing a prepackaged bankruptcy.
A Prepackaged Bankruptcy can be the solution
In a prepackaged bankruptcy, or “pre-pack,” the plan of reorganization has been voted on and accepted by the classes of impaired creditors prior to the bankruptcy filing. (“Impaired” means that the creditors’ rights have been modified in some material way.) By filing such a plan, a company can minimize the effect of the process on employee, vendor, and customer relationships. Moreover, management has more certainty that the confirmation of the plan will be successful before being exposed to potential loss of control in an extended bankruptcy proceeding.
Creditors support prepackaged bankruptcies because, by definition, the creditor is receiving more under a plan in Chapter 11 that it would in a liquidation (11 U.S.C. § 1129(a)(7)).
Pre-packed bankruptcies tend to be shorter in duration than a traditional Chapter 11 bankruptcy filing and could spare the firm time and potential legal headaches (averages of 38 days rather than 306 days for non-prepackaged).
Because they are shorter in duration (at least the component of the reorganization in which the company is under Court oversight), there is less administrative costs, and fewer opportunities for distracting (and expensive) side battles to erupt.