What Is Involved in a Prepackaged Chapter 11?

A prepackaged Chapter 11 bankruptcy is a form of financial restructuring used by companies that need debt relief but want to avoid the usually lengthy and costly Chapter 11 process. A “pre-pack” requires working out a reorganization plan with creditors and shareholders before filing a petition in court. The plan includes details on how debts will be restructured, how creditors will be paid and how the company will operate post-confirmation. Once the plan is agreed upon by the required majority of creditors, the petition and pre-negotiated plan are submitted to the court together.

Because the major terms of a pre-pack are negotiated and agreed upon in advance, disputes are avoided and the court process is significantly shortened. Legal and administrative costs are reduced, preserving more value for the company stakeholders. Additionally, prepackaged bankruptcies tend to be less public, which can help preserve the company’s reputation and customer relationships. This can be beneficial in industries where confidence among suppliers, customers and investors is critical.

Creating a successful prepackaged bankruptcy involves the company taking these key steps:

• Financial assessment — A thorough review must be made of its financial situation and of debt restructuring needs.
• Stakeholder negotiation — Mutually agreeable terms must be struck for debt repayment and restructuring, based on available forecasts and financial projections.
• Legal compliance — The company should seek legal guidance to ensure that the prepackaged plan complies with all relevant bankruptcy laws and regulations. 
• Creditor approval — The proposed plan must be voted on and approved by a certain percentage of creditors, as to both number and total claim amount.
• Court approval — The bankruptcy court must approve the plan, based on fairness and feasibility, before confirmation.

The duration of a pre-pack is generally much shorter than a traditional Chapter 11. The pre-negotiation phase can take anywhere from a few weeks to several months, depending on the complexity of the company’s debts and the number of creditors involved. Once the bankruptcy petition and plan are filed, the court process might take an additional few weeks to a few months. Overall, the pre-pack could be completed within four to six months, compared to a year or more for traditional Chapter 11 cases.

Prepackaged bankruptcies may not be suitable for all companies. Businesses with contentious debt situations or those facing significant operational challenges may find that a traditional Chapter 11 proceeding can address their issues more comprehensively.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your company is struggling with debt, call 310-271-6223 or contact us online to schedule a consultation.