The credit crisis in 2008 was no laughing matter- indeed, it is often recognized as one of the worst financial incidents of modern time, and the worst financial crisis since the Great Depression of 1929.
While relatively short in length, lasting only around a year, the events occurring between 2007 and 2008 have had significant and lasting effects on the financial world, many of which can still be felt and experienced today 15 years later.
One such change is something called a Quick Rinse Bankruptcy, which first was used to describe the planned bankruptcies of U.S. automotive giants Chrysler and General Motors as a result of the credit crisis. So, what exactly does this term refer to? In this week’s issue, that’s exactly what we’ll be looking at!
Q Stands for Quick-Rinse Bankruptcy!
What Is a Quick-Rinse Bankruptcy?
A quick-rinse bankruptcy, as the name suggests, is one that is set up to get through the legal process far more quickly than the typical bankruptcy. Although individuals might be involved in a quick-rinse bankruptcy, they often fall under the purview of corporate proceedings.
Quick-rinse bankruptcies, for instance, are a component of Chapter 11 bankruptcy filings in the US, which is a financial reorganization bankruptcy that entails reallocating the debtor's assets and debt obligations. So why do they fall under a separate bankruptcy category?
Unfortunately, traditional chapter 11 bankruptcy filings, particularly for large publicly traded corporations, may be extremely complex and take several years to complete. Similarly, chapter 11 bankruptcies hinder the firms involved by consuming resources and taking months or years to complete.
The business may find it difficult to continue operating during that period since unpaid suppliers may prevent it from making additional credit-based sales, and lenders may refuse to give the business loans. Similar to this, the duration of these traditional bankruptcies typically results in a loss of clients, working capital, funding sources, suppliers, and vendors for the company.
Altogether, this is not an ideal scenario given that the company may go under financially because of the long delay in settling its financial affairs, which was the same argument utilized when the idea of a quick-rinse bankruptcy was first conceived.
Namely, It was stated during the financial crisis that protracted bankruptcy processes related to the failure of Chrysler and General Motors would lead to a large number of job losses and a decline in consumer base, which would worsen the recession and impede economic growth.
In order to address this problem, quick-rinse bankruptcies allow for a streamlined bankruptcy process that is prepackaged and financed with government funds. It should be mentioned that when it comes to corporate bailouts, the use of taxpayer money has been a contentious issue.
How do Quick-Rinse Bankruptcies work?
It should come as no surprise that quick-rinse bankruptcy processes need to be extremely efficient given that their entire premise is around speed.
Indeed, in order to prevent the process from being held down or stopped by pointless court filings and corporate demands, quick-rinse bankruptcy require that the parties involved—typically the government, creditors, unions, and shareholders—negotiate arrangements prior to the proceedings.
In fact, the vendors and creditors frequently argue vehemently throughout bankruptcy procedures over who should be paid first and in what amount. Quick-rinse bankruptcy is, thus, essentially a pre-negotiated bankruptcy when the debtor successfully negotiates debt settlement agreements with creditors prior to actually going to bankruptcy court.
That’s all for this week's issue! Thank you for reading!