A prepackaged bankruptcy plan is a pre-drafted, shortened version of a plan for financial reorganization. Prepackaged bankruptcy plans generally qualify as a plan of reorganization in a Chapter 11 bankruptcy case. The company puts this plan together in cooperation with its creditors, and it goes into effect once the company enters bankruptcy. Unlike a standard plan for reorganization, a prepackaged bankruptcy plan must be voted on by shareholders before the company files its petition for bankruptcy.
The key characteristic of a prepackaged bankruptcy plan is that votes for a plan of reorganization have already been solicited and agreed upon prior to the filing, thereby leaving nothing to chance when it comes to achieving a successful confirmation of the plan of reorganization. This leads to another very important characteristics of a prepackaged bankruptcy: the major stakeholders in the bankruptcy have come to an agreement among themselves about the most important issues of subsequent financing, lien priority, and how the debt owed will be repaid. This reduces the potential for the court to reject the bankruptcy plan and allows the debtor to proceed directly to its contemplated reorganized operations.
This is the process for most. However, if the prepackaged bankruptcy plan involves an offer to sell a security, it may have to be registered with the U.S. Securities and Exchange Commission (SEC). Under the Bankruptcy Code, two-thirds of the stockholders who vote must accept the plan before it can be implemented. The vote is decided by majority rule.
The idea behind a prepackaged bankruptcy plan is to shorten and simplify the bankruptcy process. This saves on legal and accounting fees. It also saves time spent on proceedings and having the company under bankruptcy protection. For example, the average Chapter 11 case is rarely completed in less than a year, whereas a prepackaged case can take as little as six months. The company benefits because the sooner it can emerge from bankruptcy, the sooner it can implement its reorganization and return to generating revenues from its core operations. Additionally, there is the less-tangible benefit of limiting disruption to the company’s business and less damage to its goodwill.
There is one caveat. Prepackaged bankruptcies tend to work best when there are a limited number of creditors. If these creditors are secured creditors or lien holders and they are fairly savvy, this is a bonus. However, if there is a large number of unsecured creditors or the possibility of unknown creditors or third parties, this may not be the best option.
The first step in devising a prepackaged bankruptcy plan is to speak with a bankruptcy attorney. An attorney or law firm with experience in prepackaged bankruptcies is the best route to take.