Prepackaged Bankruptcy Definition and Process

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A prepackaged bankruptcy is often talked about as if it’s something magical or different than a regular commercial bankruptcy. However, they’re not: a prepackaged bankruptcy, or “prepack,” is simple a Chapter 11 commercial bankruptcy in which the negotiating and voting is done ahead of time.

Chapter 11s are “reorganization” bankruptcies: the goal is to come up with a plan for paying creditors and running the business that will let the company stay in operation while maximizing creditor value. The prepack is coming up with the plan in advance of filing bankruptcy, but it does not necessarily result in a plan any different than could have been worked out during bankruptcy.

Advantages of Prepackaged Bankruptcy

There are no remedies, rights, or protections available in a prepack that are not available in a regular bankruptcy. The advantage is that saves time and money. It’s estimated that the average Chapter 11 bankruptcy takes two or three years; however, a prepackaged bankruptcy might only take 6 months. This saves on legal fees and other bankruptcy costs; it also allows the business to return to business as usual that much faster.

Requirements for Prepackaged Bankruptcy

For a prepackaged bankruptcy to be successful, all the terms and conditions of the bankruptcy—including the critical terms of subsequent financing, lien priority, and the degree to which debts are discounted or paid over extended times—must be determined in advance. Moreover, the votes necessary to approve the bankruptcy are also solicited in advance, so that the bankruptcy can be presented to the court as fait accompli.

For a prepack to work—

  • The proposed plan must have been sent to the creditors and equity holders (e.g. shareholders) entitled to voted on a bankruptcy.
  • The plan must have been sent out with enough time to allow for creditors and equity holders to understand, consider, and vote on it.
  • Creditors and equity holders must have been provided with enough information that they can meaningfully vote.
  • Any other relevant laws governing communications between a company and outside parties (such as securities laws) must be complied with as well.

Rights of Impaired Creditors

It’s not hard to get the votes of creditors who stand to be paid in full or nearly in full. What’s critical is to get sufficient agreement by “impaired creditors,” or those who will be paid only a portion of their claims. The law specifies that at least one class or type of impaired creditor must vote to accept the plan.

For a creditor class to approve a reorganization plan, members of that class controlling two-thirds of the value of the class’s claims, and at least a bare majority of the number of claims, must endorse the plan. These requirements do not mean that all impaired creditors will be satisfied with the prepackaged reorganization plan, but it does make sure that at least a significant block of impaired creditors believes the plan is in their interest.

How A Bankruptcy Attorney Can Help

Prepackaged bankruptcies are complex for all participants—debtors, creditors who may be protected by the plan, and impaired creditors. Rather than try to negotiate or understand the bankruptcy plan by yourself, you should have an attorney guide you.