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.

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.

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.

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."