Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Quick-Rinse Bankruptcy

What it is:

A quick-rinse bankruptcy moves through the courts especially quickly.

How it works (Example):

Let's say Company XYZ is struggling to pay its vendors and is quickly running out of cash to pay its employees. It has tried several times to get a line of credit and turn around its business operations, but now the board of directors is leaning toward declaring bankruptcy.

The board of directors contacts the company's biggest lender, Bank ABC, which has lent Company XYZ $15 million. The company and the bank negotiate a plan under which Company XYZ will sell certain factory assets and equipment and repay Bank ABC about $8 million. Bank ABC would like to be repaid in full, but it realizes that it can either accept the $8 million or get nothing.

Company XYZ conducts similar negotiations with other, smaller creditors until it has agreements with most of them about how and when they'll receive some repayment.

After this, Company XYZ files for bankruptcy. Because all the vendors and creditors have already agreed to certain terms of repayment, the bankruptcy court does not have to deal with waiting for the parties to negotiate before closing the case. Accordingly, when Company XYZ files for bankruptcy, the court is able to process the bankruptcy much faster.

Why it Matters:

Quick-rinse bankruptcies rely on parties negotiating the terms of the bankruptcy before the bankrupt company files. In a typical bankruptcy proceeding, vendors and creditors argue considerably about who should be repaid first and in what amount.