Pre-arranged bankruptcies have significant advantages. First, the plan is confirmed more quickly. This saves administrative costs, as there is no need for litigation or intensive procedures as in an ordinary Chapter 11. In addition, due to the speed of the process and its cost-effectiveness, business operations are less affected and creditors may prefer it because it also reduces their administrative expenses.

 

However, this pre-arranged bankruptcy process must be planned in detail so that certain disadvantages of the procedure do not arise.

 

First, a prearranged bankruptcy sometimes does not allow the company enough time to be ready to plan for the implementation of the plan. The protection of Section 362, which automatically halts all collection efforts by creditors, gives the company a respite so that all possible measures can be implemented to make the plan viable. However, this protection only lasts for the duration of the case. If the case is disposed of quickly, there is less time to reorganize.

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On the other hand, contacting creditors without a clear strategy to try to negotiate a pre-arranged bankruptcy can cause them to tighten credit terms or related routine administrative procedures, suppliers to refuse to continue business relationships, or worse, some of them to file an involuntary bankruptcy petition against your business.

 

Furthermore, given the speed of the process, in which verification and approval of the plan proceed almost immediately after filing, it is not possible to use other resources provided by the Bankruptcy Law to benefit the company, such as rejecting onerous contracts.

 

However, if pre-arranged bankruptcy is planned correctly, the advantages outweigh the disadvantages, making it beneficial for both the debtor and the creditors. This has been evident in the fact that by 2011, more than 50% of large business bankruptcies in the United States occurred with some type of prior arrangement.

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It should be noted that, in some cases, pre-arranged bankruptcy may be partial in nature. In other words, an agreement may be reached with several creditors, but they may not be sufficient in terms of debt or the amount of claims for the plan to be approved. However, this is a step forward that will also benefit the speed with which the plan can be confirmed.

 

In order to achieve a pre-arranged bankruptcy, it is essential to compile all financial information relevant to the plan. It is necessary to conceptualize and draft a viability plan with a restructuring of the company that creditors can approve. This plan must identify the measures or changes that must be made to credit obligations in order for the plan to be viable. In addition, it must include all the financial and operational information that the Bankruptcy Court would require in a Disclosure Statement. This is to ensure that creditors can make informed decisions and that there will be no subsequent disputes in the sense that a complete disclosure of the operational and financial circumstances was not made when determining the approval of the plan.

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Once the aforementioned information has been compiled, it will be presented to creditors in the order that is strategically most advantageous, although it is most likely advisable to present it to the creditors who hold the largest amount of debt.

 

Negotiations with creditors should aim to get the plan approved and make the company viable, but this can only be achieved when two-thirds of the total debt and more than 50% of the creditors in an affected class approve it.