What Is Prepackaged Bankruptcy and How Does It Work?

A prepackaged bankruptcy is a Chapter 11 restructuring in which the company drafts its reorganization plan, distributes disclosure materials to creditors, and collects binding votes before it files a petition in federal court. Because the negotiation and the vote are already finished when the case begins, most prepackaged cases move from filing to confirmation in about 30 to 60 days rather than the many months a conventional Chapter 11 takes. Two provisions of the Bankruptcy Code make the approach work: 11 U.S.C. § 1121 gives the debtor exclusive control over the initial plan, and 11 U.S.C. § 1125(g) permits pre-petition solicitation of votes as long as the process complies with applicable non-bankruptcy law.¹²

Prepackaged Is Not the Same as Prearranged

The two labels get used interchangeably in conversation, but they describe different levels of pre-filing work. In a fully prepackaged case, the disclosure statement is circulated and the vote is completed before the petition is filed, so the company walks into court with the votes it needs already in hand. In a prearranged (sometimes “pre-negotiated”) case, the debtor and its major creditors agree on the shape of the deal beforehand, but the formal solicitation and vote happen after filing, under court supervision. That difference is why a true prepack can be confirmed in weeks while a prearranged case still takes months.

For companies with publicly traded debt, the “applicable non-bankruptcy law” that governs a pre-petition solicitation means SEC disclosure rules. For privately held debt, the debtor must provide what the Bankruptcy Code calls “adequate information” so creditors can make a reasonably informed decision.²

When a Prepack Fits

Any entity eligible for Chapter 11 can pursue a prepackaged filing, but in practice the strategy is used almost exclusively by corporations and LLCs with complex capital structures and a manageable number of major creditor groups. The approach self-selects: it only makes sense when the debtor knows exactly who its major creditors are, can reach them, and can offer terms that enough of them will accept. A company whose financial trouble is operational, or whose creditors are scattered and unwilling to negotiate, will not benefit from the pre-filing route.

The debtor’s organizational documents must authorize the filing, and the company must have identified which classes of debt need restructuring to avoid liquidation. Under § 1121, the debtor has an exclusive 120-day window after the order for relief to file a plan before anyone else may propose one; in a prepack the plan is filed with the petition, so that exclusivity is largely academic but confirms the debtor’s first-mover position.¹

The Plan and Disclosure Statement

Two documents carry the case. The Plan of Reorganization spells out the treatment of each creditor class: what percentage of principal is paid, whether maturities are extended, whether debt converts to equity, and any other modifications. Every impaired class (any class whose legal rights are being altered) must be clearly identified, because those are the classes entitled to vote.

The Disclosure Statement is the information package creditors rely on when voting. It needs enough detail that a reasonable creditor can evaluate the deal, including:

Complete creditor lists organized by class (secured lenders, unsecured trade creditors, equity holders, and so on).
Current market appraisals of the debtor’s property, along with going-concern value and liquidation value.
Financial projections, typically three to five years, showing how the company expects to perform under the restructured terms.
Recent historical operating results that establish a baseline for those projections.
A liquidation analysis comparing what each class would receive under the plan versus a Chapter 7 liquidation. This feeds directly into the “best interests” test the court applies at confirmation.

Soliciting Votes Before Filing

Once the plan and disclosure statement are finalized, the debtor distributes them to every impaired class for a formal vote. This pre-petition solicitation is what separates a prepackaged case from every other form of Chapter 11. Under 11 U.S.C. § 1126(b), votes gathered before the petition count toward confirmation as long as the solicitation complied with applicable non-bankruptcy law governing disclosure, or, where no such law applies, the debtor provided adequate information.³

Creditors must be given a reasonable window to review the materials and cast ballots. Federal bankruptcy courts have adopted varying guidelines: some consider 21 days sufficient for publicly traded securities and 14 days for private debt, with at least 28 days for the objection deadline. The specific timeline depends on the court where the case will be filed, and getting it wrong can sink the entire prepackaged approach.

The voting thresholds are strict. A class of claims accepts the plan only if creditors holding at least two-thirds of the total dollar amount and more than half the total number of claims in that class vote in favor.³ Both thresholds must be met within each impaired class. If a company owes $10 million in unsecured debt spread across 50 creditors, approval requires “yes” votes from holders of at least $6.67 million in claims and from at least 26 individual creditors. Once ballots are counted, the debtor compiles a voting report documenting that the statutory thresholds have been met in every impaired class.

Filing, Confirmation, and Emergence

With votes in hand, the debtor files its voluntary petition, the pre-voted plan, the disclosure statement, and the voting report at the same time. That package triggers the fast-track schedule. Most prepackaged cases resolve in 30 to 60 days from filing to confirmation.

At the confirmation hearing the judge independently verifies that the plan satisfies 11 U.S.C. § 1129. Even when every class has voted in favor, the court must find that the plan is feasible (the reorganized company will not need to liquidate or file again), was proposed in good faith, and complies with the Bankruptcy Code.⁴ The court also applies the best interests test: each impaired creditor who voted against the plan must receive at least as much under the plan as they would in a hypothetical Chapter 7 liquidation.⁵

If the judge finds the process legally sound, the confirmation order binds all creditors to the plan’s terms. Old debts are discharged and replaced by the new obligations set out in the plan. The debtor exits court supervision as a reorganized entity with a modified capital structure and begins operating under its new financial terms.

When a Class Votes No: Cramdown

Not every prepackaged case arrives with unanimous approval. If one or more impaired classes vote against the plan, the debtor can still seek confirmation through a “cramdown” under 11 U.S.C. § 1129(b). The court may confirm over a dissenting class’s objection if the plan does not discriminate unfairly against that class and is “fair and equitable” toward it.⁵ At least one impaired class of non-insider claims must have accepted the plan.⁴

What “fair and equitable” requires depends on the type of claim. Secured creditors must either retain their liens and receive deferred cash payments equal to the value of their secured interest, or receive that value through a sale or equivalent arrangement. Unsecured creditors must be paid in full, or no junior class (including equity) can receive anything under the plan; this is the absolute priority rule, and it is where most cramdown fights happen. Equity holders must receive the full value of their interests, or no junior interest can receive anything.

Cramdown is available, but relying on it partly defeats the purpose of a prepack. When a debtor anticipates that a class might reject the plan, the prepackaged approach usually builds cramdown-compliant treatment for that class into the plan from the start.

Employee, Union, and Retiree Protections

A prepackaged deal still runs through federal bankruptcy court, and the Code imposes worker protections the debtor cannot negotiate away with lenders and bondholders.

Employee claims for unpaid wages, salaries, commissions, vacation pay, and severance earned within 180 days before filing receive priority up to $17,150 per employee. Contributions owed to employee benefit plans for services in the same 180-day period also receive priority status, subject to the same per-employee cap reduced by amounts already paid under the wage priority.⁶ These priority claims are paid ahead of general unsecured creditors, so the plan has to account for them before anything flows to lower-ranked classes.

A debtor cannot unilaterally tear up a collective bargaining agreement. Under 11 U.S.C. § 1113, the company must first propose specific modifications to the union based on the best available financial information, show that the changes are necessary for reorganization, and demonstrate that all parties are being treated fairly.⁷ The debtor must then negotiate in good faith before asking the court for permission to reject the contract. The court can approve rejection only if the union refused the proposal without good cause and the balance of equities clearly favors rejection.

Retiree medical, surgical, hospital, and disability benefits get separate protection under 11 U.S.C. § 1114. The debtor must continue paying these benefits during the case and cannot modify them without either an agreement with the authorized retiree representative or a court order.⁸ The court must schedule a hearing within 14 days of a modification application and rule within 90 days; if that deadline passes, the debtor may implement the proposed changes while awaiting a ruling. Retirees with annual gross income of $250,000 or more in the year before filing are excluded from these protections unless they can show they cannot obtain comparable coverage elsewhere.

Tax Treatment of the Discharged Debt

When a reorganization plan cancels a portion of the company’s debt, the IRS normally treats the forgiven amount as taxable income. Under 26 U.S.C. § 108(a)(1)(A), any amount of forgiven debt is excluded from gross income if the discharge occurs in a Title 11 case where the taxpayer is under the court’s jurisdiction and the discharge is granted by the court or under a court-approved plan.⁹ The Title 11 exclusion takes precedence over other insolvency or farm-debt exclusions.

The exclusion is not free. In exchange, the debtor must reduce its tax attributes, dollar for dollar in most cases, in a set order: net operating losses first, then general business credit carryovers (at 33⅓ cents per dollar of excluded debt), minimum tax credits (33⅓ cents), net capital losses, property basis, passive activity loss and credit carryovers, and finally foreign tax credit carryovers.¹⁰ Reducing property basis increases future taxable gain when the property is sold. A corporation can elect on Form 982 to reduce the basis of depreciable property first, before touching NOLs and credits, which preserves NOL carryovers at the cost of lower future depreciation deductions.

Prepackaged reorganizations frequently involve issuing new stock to creditors in exchange for forgiven debt, which can trigger an ownership change under 26 U.S.C. § 382. An ownership change normally caps the amount of pre-change NOLs the company can use each year. Section 382(l)(5) provides a special bankruptcy exception: if the old shareholders and creditors end up owning at least 50% of the reorganized company’s stock as a result of their prior positions, the annual limitation does not apply.¹¹ The catch: the company must reduce its pre-change NOLs by the amount of interest deductions taken on debt converted to equity during the three years before the ownership change, and if a second ownership change occurs within two years, the annual NOL limitation drops to zero. When the 50% test is not met, Section 382(l)(6) provides a less generous fallback that reflects the increase in company value from the debt cancellation. Tax planning around these provisions is one of the most technically demanding parts of structuring a prepackaged plan.

Where Prepackaged Cases Fail

A prepackaged case can go wrong at several points, and understanding those failure modes is more useful than understanding the process when everything works.

The most common problem is a defective solicitation. If the court finds the pre-petition disclosure materials inadequate or the voting process out of step with applicable non-bankruptcy law, the pre-petition votes are worthless. The debtor is then stuck in a standard Chapter 11, with all the time and expense that entails. Courts have also refused to confirm plans where the solicitation period was unreasonably short, so cutting corners on timing to move faster can backfire.

Even with valid votes, the court can deny confirmation if the plan fails the feasibility test. The judge must be satisfied that the reorganized company is not likely to end up back in bankruptcy or in liquidation.⁴ Overly optimistic financial projections are the usual culprit. If the plan depends on revenue growth the court finds unrealistic, confirmation will be denied regardless of how many creditors voted in favor.

A confirmation order can be revoked after the fact, but only if it was procured by fraud, and any party seeking revocation must act within 180 days of confirmation.⁴ Outside that window, the confirmation order is final.

1
Office of the Law Revision Counsel. 11 USC 1121 – Who May File a Plan
2
Office of the Law Revision Counsel. 11 USC 1125 – Postpetition Disclosure and Solicitation
3
Office of the Law Revision Counsel. 11 USC 1126 – Acceptance of Plan
4
United States Courts. Chapter 11 – Bankruptcy Basics
5
Office of the Law Revision Counsel. 11 USC 1129 – Confirmation of Plan
6
Office of the Law Revision Counsel. 11 USC 507 – Priorities
7
Office of the Law Revision Counsel. 11 USC 1113 – Rejection of Collective Bargaining Agreements
8
Office of the Law Revision Counsel. 11 USC 1114 – Payment of Insurance Benefits to Retired Employees
9
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
10
Internal Revenue Service. Instructions for Form 982
11
Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change