Quick-Rinse Bankruptcy (Fast Bankruptcy)

A rapidly executed Chapter 11 bankruptcy case that involves the debtor negotiating deals with creditors prior to filing their bankruptcy petition

What is a Quick-Rinse Bankruptcy (Fast Bankruptcy)?

A Quick-Rinse Bankruptcy (Fast Bankruptcy) is just what the name implies – a rapidly executed bankruptcy case. An individual may engage in a quick-rinse bankruptcy, but it is much more commonly a corporate bankruptcy proceeding.

In the United States, quick-rinse deals are part of a Chapter 11 bankruptcy filing. A Chapter 11 bankruptcy is a financial reorganization bankruptcy that involves reorganizing the debtor’s assets and debt obligations. It is common for the debtor to be required to sell some of their assets to satisfy creditors.

 

Quick-Rinse Bankruptcy

 

Summary

  • A Quick-Rinse Bankruptcy (Fast Bankruptcy) is a rapidly executed Chapter 11 bankruptcy case that involves the debtor negotiating deals with creditors before filing their bankruptcy petition.
  • Quick-rinse bankruptcies enable a speedy financial reorganization that may be essential to the company’s continued viability as an operating business.
  • Pre-negotiated deals with creditors enable the bankruptcy court to process a bankruptcy case within mere days that, without such pre-negotiated deals, might take years to settle.

 

Understanding Quick-Rinse Bankruptcies

“Quick-Rinse Bankruptcy” is a phrase that entered the financial lexicon following the 2008 Global Financial Crisis. In particular, it was used to describe how the bankruptcies of the two major car manufacturers, General Motors (NYSE: GM) and Chrysler (NYSE: FCAU), were handled during that period.

The key element of a quick-rinse bankruptcy is the debtor successfully negotiating debt settlement deals with creditors before entering bankruptcy court. It is, in essence, a pre-negotiated bankruptcy. It is especially important with the bankruptcy of a major corporation such as General Motors, as normal bankruptcy proceedings could drag on for months or even years attempting to deal with complicated, intricate, and possibly conflicting claims from creditors, unions, and shareholders. For example, when the Delphi Corporation filed for bankruptcy, the negotiations with creditors and court proceedings were not settled for five years.

The aim of a quick-rinse bankruptcy is to enable the debtor company filing for bankruptcy to execute a fast financial reorganization and keep operating.

 

Practical Example

Assume that Company X is carrying a large amount of debt when it begins to experience severe financial problems. It falls behind on paying both creditors and suppliers and, because of its overall financial problems, it cannot obtain a loan to bring its finances current. After some debate, the company’s executive management and board of directors determine that its best course of action is to file bankruptcy.

In order to facilitate the fastest and smoothest bankruptcy proceeding possible and enable the company to reorganize financially and continue business operations, the company approaches each of its creditors, explains its situation, and tries to negotiate a settlement deal that will clear its debts.

The company may only be able to offer some creditors half or less of what it actually owes them. Still, the creditors may be willing to accept such an offer in preference to risking waiting out a lengthy bankruptcy proceeding in court, at the end of which they may end up with even less payback on the debt owed.

The company is able to negotiate settlement arrangements with all of its creditors successfully. After doing so, it then proceeds to make a bankruptcy filing. Thanks to such pre-negotiated arrangements to satisfy its creditors, when the company files its bankruptcy, the court can quickly process the bankruptcy because it doesn’t need to wait for negotiations with creditors to be worked out in court.

 

The Importance of a Quick-Rinse Bankruptcy

As previously noted, regular Chapter 11 bankruptcy proceedings, especially for a large, publicly-traded company can be very complex and take several years to conclude. During that time frame, the company may struggle to continue operations. Unpaid suppliers may cut the company off from further sales on credit, and lenders will not extend loans to the company.

Therefore, the company may go under financially because of the long delay in settling its financial affairs. A quick-rinse bankruptcy offers a solution to such a problematic situation by enabling an expedited bankruptcy proceeding.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Debtor in Possession (DIP)
  • Liquidity Event
  • Tax-Free Reorganization
  • US Bankruptcy Code

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