What is Prepackaged Bankruptcy?

A prepackaged bankruptcy is a bankrupcty plan that has been worked out between a company and its creditors before the bankruptcy is ever filed with a court system. This type of arrangement has several benefits for everyone concerned, since it helps to minimize legal costs, requires less time on the part of the court, and helps to preserve more amicable relationships between the business that is seeking bankrupcty protection and its creditors. Many courts are open to reviewing a prepackaged bankruptcy, although it is important to note that the court must still approve the arrangements before they actually go into effect.

The use of a prepackaged bankruptcy plan is most common when a business is seeking the court’s assistance with a reorganization of its debt. The idea is often not to completely do away with outstanding debt, such as in a Chapter 7 situation, although this strategy can be used to great effect even in those situations. More commonly, the plan is helpful with Chapter 11 and similar bankruptcy protection requests, in which the court is charged with the responsibility of creating and authorizing a plan that protects the company and also provides some relief to creditors.

While laws and regulations regarding bankruptcy vary somewhat from one country to another, prepackaged bankruptcy is a strategy that most courts are willing to entertain. This is because a plan of this type is worked out between the company seeking protection and at least its major creditors. In addition, the shareholders of the company have already voted in the affirmative to accept this plan, provided that it meets with the approval of the court. Assuming the provisions of the plan are acceptable to the major creditors, there is a good chance that the plan will be reviewed and accepted by the court with relatively few changes.

The end result of arranging satisfactory terms between the company and its creditors ahead of time means that much of the work that the court would require to be completed is done before the case is ever filed. This in turn helps to minimize the amount of time and effort the court must put into ordering and researching relevant documents, since they are already prepared and presented at the time the case is filed. Assuming that everything with the prepackaged bankruptcy is in order, and that the court can quickly confirm that the major creditors support the plan, the plan can be approved in relatively little time. Both the company and the creditors benefit from spending less money in legal costs, while the court is able to resolve the issue in less time and move on to other cases on the docket.