Just like a couple of months ago when Chrysler filed for bankruptcy, this week brought another moment to an essential American industry that didn’t really come as a surprise, but still sent shockwaves through the economy that are sure to be felt by many. a long time. . Another of the “big three” automakers in the United States, General Motors Corporation, has filed for Chapter 11 bankruptcy protection. The company will now begin a top-down reorganization process, with changes in ownership, credit owed and even merchandise to be placed on the market, all being certain consequences of bankruptcy. If you’ve always been a loyal buyer of GMC products, you may need to be prepared for the reality that your favorite vehicle is no longer on the lot the next time you visit your local dealership. Instead, as sanctioned by the federally negotiated settlement, you may find yourself taking a test drive in a fuel-efficient car. As we know from countless media reports, Chrysler and GMC are far from alone in their dire financial circumstances. Many other well-known companies, from Mrs. Fields Cookies to Linens ‘n’ Things to KB Toys, have all filed for Chapter 11 within the past two years.
Certainly, it’s not just these large and iconic corporations that are feeling the pinch of our nation’s current recession and ending up in bankruptcy court. Right here in the state of Texas, we have witnessed many of our local businesses being forced to file Chapter 11 paperwork. In the first quarter of 2009, the number of Chapter 11 filings in the Lone Star State it doubled from the same period a year earlier, from a total of 129 to 259. San Antonio-based Wall Homes Inc. filed for Chapter 11 in January. Houston-based Introgen Therapeutics, Inc. made the decision to officially file for bankruptcy late last year. That same month, Texas-based Pilgrim’s Pride also filed a volunteer position for relief. These recent filings demonstrate just a few examples of how Texas business owners are fighting back and taking the drastic measures necessary to stay afloat.
What exactly is Chapter 11 bankruptcy and what are the repercussions a business can expect to face once the paperwork is officially in the hands of the court? While this option is available to both businesses and individuals, Chapter 11 is more commonly known as “reorganization” of a corporate entity. This is different from the Chapter 7 asset liquidation process that most people are already familiar with, and a topic I wrote an article about last week. Chapter 11 can be filed in bankruptcy court through a voluntary petition by the debtor who realizes the need for restructuring, or the petition can be involuntary, which occurs when creditors step in and demand legal recourse. The Federal Bankruptcy Code requires the debtor or other interested party to develop a plan to address the needs of creditors, and the period given to file a reorganization proposal is typically 120 days. This plan must be agreed upon by the bankruptcy court and the company’s creditors. The court appoints a United States trustee to make sure the plan is followed and to oversee the company’s efforts going forward. Since it is generally in the best interest of creditors for the failed business to keep its doors open to consumers, the debtor can remain in possession of its assets and continue to operate the business. Debtors can get out of a Chapter 11 bankruptcy in as little as a few months or several years from now. In some cases, however, a productive reorganization never occurs. Chapter 11 filings that have a success rate of ten percent or less.
Since GMC is in the news right now and most readers are familiar with the company, the current situation of this automaker provides a great example for a better understanding of Chapter 11 bankruptcy. Before bankruptcy, Chrysler and GMC had been in negotiations for months with their major creditors in an attempt to reach a payment agreement without filing for bankruptcy. When these efforts were unsuccessful, Chapter 11 paperwork was filed.
Regarding the Chrysler bankruptcy, the Treasury Department will provide Chrysler with $8 billion in new loans, on top of the previous $4 billion given as part of the previous bailout. This money will allow Chrysler to function while it works during the bankruptcy, as well as operate without interruption once the company is able to emerge from bankruptcy. Once Chrysler exits its Chapter 11 status, United Auto Workers will own 55% of Chrysler and automaker Fiat will own a 20% stake with an option to increase it to 35%. The US government, aka the American taxpayers, will own 8% of the company and even Canada, which has advanced some loans to Chrysler, will have a 2% stake. Workers will feel the effects of this week’s decision, as all plants will close starting Monday and remain closed until Chrysler emerges from bankruptcy. Under the agreement, these men and women will receive about 80% of their normal salary through unemployment checks and union benefits.
These recently completed negotiations by Chrysler, with the proposed resolution now in the hands of federal bankruptcy court, are similar to those currently being conducted by companies across Texas. While the option to reorganize and partially forgive your debts while still maintaining the ability to stay in business seems quite attractive and is often the best alternative for a struggling business, the consequences to your creditors, the composition of your business and your good name are real enough. If you are a business owner considering filing for Chapter 11 bankruptcy, careful and detailed legal advice is essential. There are attorneys who practice solely in the area of bankruptcy law and their experience will be needed as you navigate this process and hopefully result in a more profitable and healthy venture on the other side. Don’t make the mistake of taking the first step down the Chapter 11 path without having a knowledgeable attorney by your side.
