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So-called prepacks sometimes get confused with their cousins, prenegotiated and prearranged Chapter 11 plans. And things have gotten increasingly byzantine ever since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which has led to speedier bankruptcies. Debtors have become wary of the new code's exclusivity cap and running the risk of testing many of its other amendments. The result has been more Section 363 sales and simply more attempts to get in and out of Chapter 11 in a hurry.
Debtors often try to maximize that exit efficiency through a prepack, which is so named because it is supposed to be voted on by all eligible creditor classes before a company even files its petition. In contrast, prenegotiated or prearranged proposals are plans that creditors have discussed and have come to general agreement on -- but have not formally voted in favor of. As a result, once the filing is made, they could blow apart, which is something Erik Moser wrote about for The Deal in early 2005. But prepacks aren't foolproof, either, despite the fact that they've gone to a creditor vote. Witness Sirva, which entered Chapter 11 on Feb. 5 with a prepack that was equipped with both debtor-in-possession financing and exit financing. It boasted an expected emergence of between 60 and 90 days. The problem? It still has to be approved by a bankruptcy judge. And if it has to be approved by a judge, it means the plan will get a hearing, giving any dissidents the ability to voice their objections. No matter how many creditors voted in favor of the plan. And that's what happened. Sirva's plan separated unsecured creditors into two classes, with one group getting paid in full and the other getting wiped out. Multiple objections ensued, leading to a contested confirmation hearing. Sirva eventually relented and changed its plan to appease the dissenting creditors, something that The Deal is reporting on Thursday. But it's certainly not the first time. Bally Total Fitness Holding Corp. went through something similar last year, only with a prearranged plan. Bally ended up emerging from bankruptcy under a vastly different proposal. What's the lesson? Despite the suggestion of efficiency and consensus that the use of terms such as prepack, prearranged and prenegotiated might invoke, they could be anything but. Something to remember given the increased crush of bankruptcy filings and the need for speed many debtors and creditors seem to have about exiting from them. - Ben Fidler Categories Deal Video
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Prepackaged Chapter 11 bankruptcy plans can be a misnomer, as the situation surrounding bankrupt relocation company Sirva Inc. attests. 
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