(Reuters) - OxyContin maker Purdue Pharma LP is preparing to seek bankruptcy protection before the end of the month if it does not reach a settlement with U.S. communities over widespread opioid litigation, three people familiar with the matter said, after some states balked at the company’s $10 billion to $12 billion offer in August to end their lawsuits as part of a negotiated Chapter 11 case.

FILE PHOTO: Bottles of prescription painkiller OxyContin made by Purdue Pharma LP sit on a shelf at a local pharmacy in Provo, Utah, U.S. April 25, 2017. REUTERS/George Frey/File Photo

On Friday, Purdue lawyers had documents prepared for a Chapter 11 filing at a moment’s notice, Reuters has learned. A federal judge, who expects plaintiffs to update him on settlement progress this week, wants 35 state attorneys general on board with a deal, a threshold that has not yet been reached, the people familiar with the matter said.

Purdue lawyers have told lead attorneys for local governments and some state attorneys general for weeks, and again in recent days, that the company will have to file for bankruptcy without a settlement if one is not reached soon, one of the people said. This approach is known as a “free-fall” bankruptcy filing because it lacks consensus on a reorganization beforehand.

Strong opposition from some attorneys general such as those in Massachusetts and New York emerged last week after confidential discussions on Purdue’s settlement talks became public in media reports, with Connecticut’s calling for Purdue to be “broken up and shut down,” and sold in parts. Their main sticking point is how much Purdue’s controlling Sackler family will pay, the people said.

Purdue faces more than 2,000 lawsuits from cities, counties and states alleging it helped fuel the U.S. opioid epidemic, and Reuters reported in March that the company and family began exploring bankruptcy options for Purdue to halt lawsuits and attempt to resolve litigation with plaintiffs rather than fight every single case.

Purdue and the Sacklers, who also face lawsuits, have denied the allegations.

One reason the Stamford, Connecticut company is determined to file for bankruptcy this month is an October 21 trial Purdue wants to avoid, the people said. The trial, stemming from widespread lawsuits largely brought by local governments that are consolidated in an Ohio federal court, risks a verdict with outsize damages that Purdue, currently carrying $500 million in cash, cannot withstand, one of the people said.

The bankruptcy timing could slip if Purdue reaches a settlement or the October trial is delayed, the people said. Ohio’s attorney general last week asked a federal appeals court to halt the trial.

Sackler representatives had no immediate comment regarding Purdue’s bankruptcy planning or the details of settlement talks.

In a statement, Purdue said it “has made clear that it prefers a constructive global resolution” as opposed to “years of wasteful litigation and appeals.” Purdue is “actively working with state attorneys general and other plaintiffs on solutions that have the potential to save tens of thousands of lives and deliver billions of dollars to the communities affected by the opioid crisis,” the company said.

A representative for a plaintiffs’ executive committee in the opioid litigation did not respond to a request for comment.

NEGOTIATED BANKRUPTCY VS. “FREE-FALL”

With a stable balance sheet and no significant debt, Purdue Pharma’s woes are legal, rather than financial. Purdue believes that it could put itself on firmer footing, and potentially restructure and resolve lawsuits in less time, if it were able to file for bankruptcy with a settlement in hand, the people said.

In recent negotiations to resolve the litigation, documents exchanged among the parties outlining possible settlement terms included Purdue’s plan to file for bankruptcy and become a public benefit corporation with a board selected by court-appointed trustees, the people said. The public trust would donate millions of doses of drugs the company developed to combat overdoses and addiction to U.S. communities, which Purdue values at $4.45 billion over 10 years.

The Sacklers, who amassed a multibillion-dollar fortune from OxyContin sales, would cede control of Purdue, they said.

On the other hand, a Chapter 11 filing without a deal could bring prolonged, more expensive bankruptcy proceedings and trigger even more litigation, the people said. Some states have said they will resist Purdue’s attempt to use bankruptcy proceedings to halt litigation.

The company is preparing for states to argue their lawsuits cannot be halted by a Chapter 11 filing because their legal actions were brought to enforce public health and safety laws—exempting them from the usual bankruptcy rules that would stop their complaints.

A free-fall bankruptcy could result in recoveries closer to $1 billion for U.S. communities suing the company as opposed to the up to $12 billion in value Purdue attaches to its current proposal, according to calculations the company’s lawyers have shared with plaintiffs.

Several state attorneys general contend the Sacklers’ proposed settlement contribution is too low, the people said. The family offered to pay $3 billion over seven years and to add $1.5 billion or more by eventually selling another business the family owns called Mundipharma, they said.

But these state officials do not want the additional $1.5 billion to be contingent on the Mundipharma sale, and prefer the Sacklers guarantee $4.5 billion, the people said. Another contentious point is the family’s proposal to pay small amounts of the $3 billion of cash initially and more later, other people familiar with the negotiations said.

Some state officials also want to know more about the family’s finances before agreeing to a deal, concerned more money could be available for a settlement, these other people said.

The Sacklers as of last week had not moved from their offer, according to the three people familiar with the talks.