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How pre-negotiated arrangements can protect California businesses

On Behalf of | Apr 26, 2023 | Bankruptcy

Although individuals in California might engage in a quick rinse bankruptcy, corporate settings are where they are more commonly seen. An immediate rinse bankruptcy, which falls under Chapter 11 bankruptcy, typically involves restructuring assets and debts. It is not unusual for a debtor to sell off assets to repay creditors.

The basics of a quick rinse bankruptcy

Financial experts began discussing quick rinse bankruptcies at the end of the 2008 global fiscal crisis. This then newly minted term described how the bankruptcies of Chrysler and General Motors were handled.

A key factor in a quick rinse bankruptcy is that a debtor can successfully come to a debt settlement with their creditors before going to the bankruptcy court. Broken down to its most basic definition, a quick rinse bankruptcy is a pre-negotiated bankruptcy.

The benefit of this fast, pre-negotiated bankruptcy for large corporations is that it prevents default from dragging on for months or years. In the interim, creditors, shareholders and unions are financially affected. In addition, when properly executed, a quick rinse bankruptcy allows a company to file for bankruptcy and quickly reorganize itself without interrupting its operation.

How a quick rinse bankruptcy works in practical terms

Imagine a company facing financial difficulties, burdened with debt and unable to secure a loan to address its financial woes. As a result, the owners or directors decide to file for bankruptcy. To facilitate a smooth bankruptcy process and enable the company to continue its operations, the owners engage in discussions with creditors. They explain the situation and negotiate terms to settle the debts.

Some creditors may receive less than 50% of the amount owed, but they may still prefer this outcome over a protracted bankruptcy proceeding, where the final recovery could be even lower. A pre-negotiated bankruptcy arrangement may not be flawless, but when managed effectively, it can safeguard the business from collapsing and enable repayment to creditors.