Why have prepackaged bankruptcies become so popular in recent years?

Explanation

Following are the benefits of prepackaged bankruptcies that have increased its popularity are-

Reduction of the holdout problem- In a prepackaged bankruptcy, the firm forms a reorganization plan and gets most creditors to agree with the plan before filing for bankruptcy. If most of the creditors have agreed with the reorganization plan, the reluctant creditors can be brought along with the help of a cramdown.
Preservation of creditor's claims- When all creditors agree with the reorganization plan with the help of a cramdown, all creditors are paid on a pro-rata basis. This pro-rata settlement of creditor's claims helps in the preservation of their claims.
Tax savings - When debtholders trade their debt for equity, if the original shareholders are left with less than 50% ownership, the company does not have to carry forward its accumulated tax losses. If the company exchanges its debt worth, let's say, $1000 for a debt of $600, then the reduction in $400 debt is a taxable income under prepackaged bankruptcy. But this reduction is not allowed under formal bankruptcy.

Verified Answer

Following are the benefits of prepackaged bankruptcies that have increased its popularity are-

Reduction of the holdout problem.
Preservation of creditor's claims
Tax savings