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Definition of 'Prepetition Liability'
A term that refers to liabilities that arise prior to a company filing of bankruptcy. A company has to petition for bankruptcy protection; once this is done, liabilities fall into two categories: prepetition, or those that arise prior to petition, and post-petition, those that arise after petition. These two types of liabilities are often shown on the balance sheets of companies in bankruptcy protection.
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Investopedia explains 'Prepetition Liability'
The classification of a liability as either prepetition or post-petition has significant influence on the amount the company will have to pay for the liabilities. A prepetition liability is likely to only get a fraction of its original value, while a post-petition liability will likely be paid in full - assuming the company exits bankruptcy protection in good shape.
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