It’s not a term that gets used a lot – prepackaged bankruptcy – but it’s interesting to note that a lot of major companies file for pre-packaged bankruptcy – including Claire’s and Remington.
In a prepackaged bankruptcy, a company will negotiate with key creditors who will then vote on the company’s plan before actually filing the Chapter 11 petition. This can be helpful because prepacks allow companies to shorten the often costly bankruptcy process.
When a company knows it’s going to need to file for bankruptcy, one of the quickest options available is a pre-packaged bankruptcy.
A Pre-packaged bankruptcy is when a company that is facing bankruptcy arranges creditor support for their bankruptcy plan before they actually file. The plan for financial reorganization is prepared in cooperation with its creditors and must be voted on by shareholders before the company starts bankruptcy proceedings. Because everything is “pre-agreed” to it can result in a shorter turnaround time.
If you are considering bankruptcy, you’ll want to work with a bankruptcy attorney that can advise you on what your best options are – whether that be a pre-packaged bankruptcy or a standard timeline bankruptcy. If you are a business, most likely you’ll be considering a Chapter 11 bankruptcy.
Chapter 11 Bankruptcy
Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits. If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.
The Chapter 11 bankruptcy process can be a complex, and lengthy one. If you are facing a Chapter 11, you’ll want to work with a bankruptcy attorney to understand the process and what you will need to do to move through it. They will be able to explain the terminology in addition to what is legal, and what you will be required to do.
A corporation or individual that has filed for Chapter 11 bankruptcy protection is referred to as a “debtor in possession (DIP).” Once the filing has been made they remain in control of any property, or business, that a creditor has placed a lien against. The debtor in possession also retains the power to operate the business in the best interest of any creditors. A DIP is able to operate under the ordinary course of business but will be required to seek court approval for any action that might fall outside of the scope of traditional business activities. Additionally, the DIP must keep precise financial records and also file any appropriate tax returns.
Outline of Chapter 11 Bankruptcy Process
The bankruptcy process can be a tedious and overwhelming one. That’s why it is always advised that you work with a bankruptcy attorney that can walk you through the steps. Below we outline the general process of a Chapter 11 Bankruptcy. Keep in mind that this is just a general process, and your bankruptcy proceeding might require additional steps to discharge your debt.
Preparing the Petition
To prepare your petition you will need to complete a list of your (or your company’s) assets, debts, income, and expenses. Additionally, you will need to create a summary of your financial affairs. Review everything to check for accuracy. Then you will be able to file your petition with bankruptcy clerk’s office. This filing triggers an “automatic stay” which prohibits most creditors from being able to continue their collection efforts against you or your assets until a bankruptcy judge gives them permission to do so.
At this point, new bank accounts are opened which name the debtor in possession. The DIP remains in control of the business operations, but can be terminated at any point by the court if assets are being improperly managed, or if the DIP does not follow court orders. At that point, the court will appoint a trustee which will then maintain the guidelines that have been specified by the United States Trustee’s office.
You will need to file a disclosure statement containing information about your financial affairs. This will allow your creditors to make informed decisions when they decide if they will accept or reject your plan.
What should be included on the disclosure statement is dependent on the nature, history, and size of the Chapter 11 debtor. For small business cases, a bankruptcy court may decide a separate disclosure statement is not needed because the plan of reorganization provides thorough information.
Here are some of the typical items included in a disclosure statement:
- financial history of debtor
- circumstances that led to the bankruptcy filing, including significant events like job loss or injury
- summary of reorganization plan
- description and value of debtor’s assets
- description of claims, liabilities and how they are addressed in the plan
- tax consequences of reorganization plan
- plan confirmation procedures and requirements
- feasibility of plan
- comparison with Chapter 7 liquidation, and
- all other information that a creditor would need to make an informed judgment about the plan.
The disclosure statement and proposed plan of reorganization is then mailed to every party in interest, including your creditors. The disclosure statement also includes information for your creditors that explains how they may participate in the bankruptcy. It also includes information regarding how the creditor’s rights may be adversely affected.
After the disclosure statement is filed, a court holds a hearing to approve or reject it. Typically, a plan will not be accepted or rejected until the disclosure statement is approved.
There will be a hearing for the disclosure statement during which parties involved can object to the language included in the statement. Usually, disclosure statements are approved and the hearing is just a formality.
Proposed Plan for Reorganization
You will outline how creditors will be treated in your plan of reorganization. Creditors are assigned as either priority debt creditors, secured debt creditors, or unsecured debt creditors. If a creditor does not approve how they are treated in your proposed plan of reorganization, you are able to file a motion (called a cramdown) asking the judge to force the creditor to accept the plan.
You will ask a judge to approve your plan of reorganization at your confirmation hearing. All of your creditor classes will need to have accepted your plan for a judge to be able to approve the plan. This is where you would file a cramdown motion if you have not received approval. A court will then need to reschedule the confirmation hearing. If the creditor does not respond to this motion for cramdown, it is ruled as accepting the plan. But if the creditor does respond to the motion, you will need to negotiate with the creditor to try to get it to accept plan treatment. If an agreement cannot be made between you and the creditor, then a judge will decide at a hearing.
After your reorganization plan is approved, you have to start making payments to creditors in accordance with that confirmed plan. You will need to abide with the new contract you have with each of your creditors. If you default on payments, a creditor may sue you on that basis. Because of the agreed to plan, you will have little recourse.
Payments can continue for many years depending on your proposed plan. And debts such as mortgages or car notes typically get re-amortized over an extended period. This means a lender recalculates the monthly payments during the repayment term.
Discharging of Debts
A discharge of debts is the main reason you enter Chapter 11 bankruptcy, and it happens after you have made all required payments to your unsecured creditor class. After paying everything off you will ask the court for a discharge of the remainder of your unsecured debts. This motion prevents any of these creditors from collecting on any of the debts in the plan. This is the end of your Chapter 11 bankruptcy.
Working with a Bankruptcy Attorney
Bankruptcy law can be hard to understand. As you can see, there are a number of restrictions when it comes to filing multiple and subsequent bankruptcies. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. A bankruptcy attorney might also be able to prescribe options that keep you out of having to declare bankruptcy in the first place. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.