Ideally, companies filing Chapter 11 bankruptcy want to enter and exit bankruptcy as quickly as possible. But sometimes a bankruptcy case can move so fast that it can cause problems for both the creditors and the bankruptcy trustee.
Below are a few issues that may arise in a "too fast" Chapter 11 bankruptcy case:
- If a bankruptcy case goes too fast, there is a possibility that asset values may be reduced. If a debtor company rushes to sell assets at "fire sale" prices when patience may have produced a higher bid, unsecured creditors might be especially hurt. This is why bankruptcy trustee's examine asset purchases to make sure that the bankruptcy estate is not being cheated because the debtor is rushing to sell.
- Sometimes if a bankruptcy case is moving forward too quickly, disclosure statements may be sparse or nonexistent. Disclosure statements in bankruptcy allow creditors to see how a particular asset will impact them. For example, in the Borders Group bankruptcy, landlords bitterly complained because the bookseller was rushing to sell to a potential bidder. But in their rush, Borders failed to disclose to landlords whether their leases would be renewed if the sale was approved. Creditors need proper disclosure statements so that they can make intelligent decisions about whether or not they will support a particular asset sell.
- Also, if a bankruptcy case is progressing too quickly, all parties including the bankruptcy trustee may not be able to perform adequate discovery, review and analysis. This process is especially important in bankruptcy cases which involve controversial issues.
Bankruptcy courts often resolve the issue of a fast paced bankruptcy case by reserving the right to final approval of any sales agreement even after it has been signed by the buyer and debtor. This means that the bankruptcy debtor may be allowed to enter into an agreement with a bidder but it's finality will be contingent upon the approval of the bankruptcy court.