Thursday, March 26, 2009

Prepackaged bankruptcies

At Shenwick & Associates, we’re seeing an increasing amount of small companies looking for relief under the Bankruptcy Code. Companies filing for bankruptcy protection are increasingly turning to prepackaged bankruptcies, a tool used by Chapter 11 attorneys since the early 1990s.

These “prepacks,” as they are known, have gained popularity since changes made to bankruptcy law by the Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA).

Some of the advantages of pre-packaged bankruptcies are:

1. Creditors and Debtors negotiate out of court, which keeps the parties’ business affairs out of the public eye and reduces administrative expenses, since the company is only paying as expenses are incurred.

2. Prepacks can be completed in a matter of weeks, while traditional Chapter 11 cases take a year or more.

3. Prepacks have a higher rate of success compared to traditional Chapter 11 bankruptcy filings.

4. Prepacks are useful for large workouts, where there are few significant creditors, other than a lender and the claims of other creditors are to be substantially paid in full as part of the plan.

5. In states with high conveyance taxes (like New York), a prepack is a good way to effect a transfer of distressed real estate without paying transfer taxes.

6. Reduced disruption of the Debtor business.

7. Increased confidence that the reorganization will succeed.

8. Minority creditors are less likely to be able to command a premium from the Debtor to consent to the restructuring.

9. “Lockup agreements” can be used to bind shareholders and/or creditors to the terms of a restructuring proposal.

For more information about pre-packaged bankruptcies, please contact Jim Shenwick.

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