What You Need To Know About Pre-Packaged Bankruptcy and 363 Sales

January 20th, 2010 by Reed Allmand

In 2009 we saw many corporate bankruptcies move swiftly, with the company filing bankruptcy and emerging form the bankruptcy process in only a few months.  But what exactly are the bankruptcy tools being used by companies such as CIT Group, Gm and others? Let’s take a look at two frequently used strategies in Chapter 11 bankruptcy:

Pre-Packaged Bankruptcy

A Pre-packaged bankruptcy is basically when a company arranges creditor support for their bankruptcy plan before they file bankruptcy.  They don’t need to get the support of all their creditors to be effective, they just need the most important ones to create a successful “pre-packaged bankruptcy.” Companies such as Lear Corp and Lazy Days RV Center, used pre-packaged bankruptcy to expedite their way through the bankruptcy process.

363 Sales

A “363 sale” is when a company in bankruptcy quickly sells assets to start a new company with new owners. During the bankruptcy, the company can sell nearly all key assets to a new buyer in lieu of a formal bankruptcy reorganization plan. Companies such as Eddie Bauer Holdings Inc., used this strategy to enter and exit Chapter 11 bankruptcy quickly.

While both these strategies have been particularly successful during this recession, during good times, junior creditors can become emboldened and might challenge the company during a pre-packaged bankruptcy or even a 363 sale.  We saw such showdowns play out with CIT group despite the recession. It’s important to know that both strategies have inherent risks and vulnerabilities, so it’s best to work closely with your bankruptcy attorney to make sure your strategic plan carefully considers all variables.