What Is a Quick-Rinse Bankruptcy?

A quick-rinse bankruptcy is a bankruptcy proceeding that is structured to move through legal proceedings faster than the average bankruptcy. All parties involved negotiate terms before a company files for bankruptcy.

The term "quick-rinse bankruptcy" first emerged during the credit crisis that started in 2008 and was used to describe the planned bankruptcies of U.S. automotive giants Chrysler and General Motors.

How a Quick-Rinse Bankruptcy Works

In order for quick-rinse bankruptcies to be effective, involved parties must negotiate terms prior to the proceedings. These negotiations take place between the government, creditors, unions, shareholders, and other parties in order to prevent filings by these parties in court that would otherwise slow down the process.

A quick-rinse bankruptcy, also known as a controlled bankruptcy, involves taxpayer financing. Such pre-negotiated bankruptcies arose during the credit crisis of 2008 due to the perceived impact that the Chrysler and General Motors failures would have on the economy. It was argued that drawn-out bankruptcy proceedings would result in massive layoffs and a loss of customers that would deepen the recession and further stunt economic growth.

In bankruptcies such as those of General Motors and Chrysler, where preserving the value of the companies and giving them the best chance of reorganization and survival is of paramount importance, speed is of the essence. The first question among negotiators and administrators is how fast or when an agreement should be reached. A company on the brink only has a limited amount of time before it begins to lose significant portions of its customers, working capital, financing sources, suppliers, and vendors.

Benefits of a Quick-Rinse Bankruptcy

The primary benefit of a quick-rinse bankruptcy is speed. Chapter 11 bankruptcies are time-consuming, take up resources, primarily money, and can drag on for months or years, impeding the businesses involved. A quick-rinse bankruptcy moves the process along quickly, which is particularly important for creditors so that they can continue on with their own businesses by taking stock of their financial situation after dealing with a bankrupted entity.

Quick-Rinse Bankruptcy vs. Prepackaged Bankruptcy

A quick-rinse bankruptcy has roughly the same purpose as a prepackaged bankruptcy; to avoid the slow, complicated, and expensive drag of court proceedings. The two types differ in that a quick-rinse bankruptcy comes with the promise of taxpayer financing, such as the government bailouts of General Motors and Chrysler in the wake of the 2008 financial crisis.

With a prepackaged bankruptcy, a company in distress will tell its creditors that it wants to negotiate bankruptcy terms before it files for court protection. This gives creditors the opportunity to work with a company to come to an agreement on repayment terms before a Chapter 11 filing is made.

The New York Times described controlled (or quick-rinse) bankruptcies as existing "somewhere between a prepackaged bankruptcy and court chaos."

Example of a Quick-Rinse Bankruptcy

Company ABC has not been able to sell many of its goods for the past year. The company has generated no profits and has had to borrow money from a few creditors to stay afloat. The company has reached a point where it is in debt, is not able to borrow more, and sees no way out of its current situation. The management of the company decides to declare bankruptcy.

Before declaring bankruptcy, however, ABC negotiates terms with its creditors. It owes $5 million to Bank One, $2 million to Bank Two, and $4 million to Bank Three. After assessing the value of all of its assets, which includes vehicles, machinery, and a small warehouse, ABC determines it can pay Bank One $3 million of the $5 million, Bank Two $500,000 of the $2 million, and Bank Three, $1 million of the $4 million.

The banks are not happy about this but rather than receive nothing at all, they agree to the terms. When Company ABC declares bankruptcy, the court and proceedings move quickly without any hold-ups as all parties have already agreed to the terms of the bankruptcy.