Quick-Rinse Bankruptcy

A quick-rinse bankruptcy is a bankruptcy proceeding that is structured to move through legal proceedings faster than the average 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. 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 may also be known as a "controlled bankruptcy."

Such pre-negotiated bankruptcies arose during the credit crisis of 2008 due to the perceived impact that the Chrysler and GM 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. As an example of a normal bankruptcy for an automotive company, one should look at the bankruptcy of Delphi Corp., which went into bankruptcy in 2005 and still had not emerged by 2009.

A quick-rinse bankruptcy has roughly the same purpose as a pre-packaged bankruptcy — to avoid the slow, complicated and expensive drag of court proceedings — but differs in that a quick-rinse comes with it the promise of taxpayer financing. With a pre-packaged bankruptcy a company in distress will tell its creditors that is wants to negotiate terms of bankruptcy 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 pre-packaged bankruptcy and court chaos." 

In bankruptcies such as those of GM 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 essentially important. 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 have good reason to move quickly because value, relationships and human capital erode daily.