Quick-Rinse Bankruptcy

By 
WILL KENTON
 
 
Updated Dec 2, 2020
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.

KEY TAKEAWAYS

 The aim of a quick-rinse bankruptcy is to move through legal proceedings

faster than the average bankruptcy.
 All parties involved negotiate terms prior to the bankruptcy proceedings.
 The name quick-rinse bankruptcy was coined in 2008 during the credit
crisis and described the bankruptcies of Chrysler and General Motors.
 A quick-rinse bankruptcy differs from a prepackaged bankruptcy in that it
comes with the promise of taxpayer financing.
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.1

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.2  1

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.3

 
All parties in a quick rinse-bankruptcy have good reason to move quickly
because value, relationships, and human capital erode daily.

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.

39
The number of days it took GM to emerge from its quick-rinse bankruptcy.4
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. 5

The New York Times described controlled (or quick-rinse) bankruptcies as

existing "somewhere between a prepackaged bankruptcy and court chaos."