What is Prepackaged Bankruptcy?

Prepackaged bankruptcy refers to a plan for reorganization under Chapter 11 that a company drafts in cooperation with its lenders.

How Does Prepackaged Bankruptcy Work?

If a company determines that Chapter 11 bankruptcy is inevitable, it may first contact and meet with its lenders in order to formulate a mutually beneficial reorganization plan prior to any official proceedings. The prepackaged bankruptcy is submitted to the bankruptcy court at the same time the company files its official bankruptcy petition, and the court then decides whether or not to accept the proposed plan.

Why Does Prepackaged Bankruptcy Matter?

The principle advantage of prepackaged bankruptcy is that it puts in place a prearranged plan for debt repayment concurrent with the insolvent company's reorganization. Prepackaged bankruptcies are, in most cases, expedited because negotiations between creditors and lenders are eliminated and all data relevant to the petition is submitted with the plan.

Where circumstances permit, lenders often prefer to participate in a prepackaged bankruptcy because it increases the likelihood they will fully recover outstanding receivables in a shorter timeframe while reducing the associated legal costs.