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Chapter 11 bankruptcy offers many benefits, the biggest of which is the ability to discuss your reorganization plan with creditors and negotiate your debt repayment prior to submitting your petition. Called prepackaged bankruptcy, here's more information about this procedure and how to determine if it's the right option for you.

Bringing Creditors Onboard

In a standard bankruptcy, the petitioner fills out the schedules listing their assets and debts and lets the court work things out with their creditors. Chapter 11 is unique, though, in that it lets companies work directly with their creditors to develop a viable repayment plan and then submit that plan with their petition for approval by the court.

Conducting the bankruptcy this way cuts out many of the legal proceedings that would normally be required to complete a traditional chapter 11. As a result, the process is completed faster and the company can return to normal operations within months instead of years. For creditors, while they may not get the full amount owed to them, they have the opportunity to negotiate for more money than they would've gotten if they left things to the bankruptcy court.

Pros and Cons of Prepackaging Your Bankruptcy

As noted previously, a prepacked bankruptcy saves time which, in turn, saves money in legal fees and other costs associated with managing the bankruptcy. Developing the plan can put both creditors and shareholders at ease because it eliminates much of the uncertainty inherent in the process. Creditors know how much money they'll receive and shareholders will know what it takes to get the company back on track.

However, sometimes a prepackage bankruptcy can backfire. Creditors will know the company intends to file chapter 11, and this can cause some of them to initiate lawsuits and other aggressive collection actions to get their money before the protection of the automatic stay falls in place. This can put more financial stress on the company, leading to a less than ideal outcome.

The court, too, may take issue with the plan. For instance, if one creditor appears to receive a much bigger payoff than the others, the judge may feel the company is engaging in preferential treatment. This can result in all parties being sent back to the negotiation table to develop a fairer repayment schedule, increasing time and expense.

Regardless of whether you think this option works for you, it's essential you contact a bankruptcy attorney for help with the process. Filing chapter 11 can get complicated pretty quickly, but an attorney can provide direction and assistance to ensure you make it to the other side in a better financial position. For help with your case, contact a local bankruptcy attorney.