A Prepackaged Bankruptcy Plan Can Save You Money!

By Tsu-Han (Ina) Chang

Legal fees, accounting fees, and time are just some of the costs incurred by the debtor when filing for bankruptcy. However, in a time of financial distress, how can a “prepackaged bankruptcy plan” help save the company from spending more money?

When a debtor is in financial trouble(s), they can file for bankruptcy. However, before this occurs, the debtor can negotiate a prepackaged bankruptcy plan with the lender/creditor. The purpose of the plan is to essentially allow the company to reorganize the company as to quickly return to operations and hopefully generate revenue once more. Although the plan may fail, it is a risk-free extension of time given to the company in trouble. This plan is considered to be risk-free in that it serves to eliminate the costs and delays often associated in a bankruptcy case. However, the prepackaged bankruptcy plan also protects the lender/creditor by returning the title back to the lender/creditor in the case reorganization fails.

There are eight basic parts to a prepackaged bankruptcy plan:
1. The lender is to be released from all lender liability claims.
2. Any and all cash flow will be handled in a manner previously agreed upon by the lender and the borrower.
3. Under Chapter 11, the borrower is given a set period of time to attempt to sell off its assets in order to pay the lender/creditor.
4. If no sale occurs during the period, the lender will have the option to conduct a foreclosure sale.
5. If after the foreclosure sale, the lender has yet to be fully paid off, the title to the remaining property will be transferred the lender.
6. The borrower cannot delay any foreclosure proceedings.
7. A compensation agreement executed by a third party then becomes effective after the foreclosure proceedings in order to assure the lender receives the title on the final date.
8. The lender is responsible for costs generated during this process.

It is important to remember that the prepackaged bankruptcy plan must be voted on by the company’s shareholders prior to filing for bankruptcy.


References:
http://www.firstam.com/content.cfm?id=3148
http://investopedia.com/terms/p/prepackagedbankruptcy.asp?viewed=1
http://www.newyorker.com/online/blogs/stevecoll/2008/11/prepackaged-ban.html