November 21, 2008
‘Big 3’ face difficult choice regarding bankruptcy
CARBONDALE, Ill. -- The prospect that one or more of the nation’s Big Three automakers may file for bankruptcy reorganization is not only an option, “it may be a real possibility,” according to Southern Illinois University School of Law Dean Peter C. Alexander.
With Congress on Thursday asking Chrysler, Ford and General Motors to provide a $25 billion bailout spending plan for the legislators’ consideration by Dec. 2, the continuing financial hemorrhage all three automakers face is worsening.
Without a rescue plan, automakers could file for Chapter 11 bankruptcy, provided the auto companies are each financially solid enough to continue while working toward a reorganization plan, said Alexander, a national expert on bankruptcy law who teaches a class on the subject.
Seeking bankruptcy could give automakers the opportunity to streamline expenses and protect them from creditors, in turn providing them a breathing period to try to restructure debts, Alexander said. But creditors can challenge bankruptcy plans and collective bargaining agreements, and existing health and pension plans may require renegotiation. Companies would no longer control every single aspect of their business, Alexander said.
In addition, business bankruptcy filings are unusual. In 2007, nearly 97 percent of the nation’s 850,912 bankruptcies were non-business filings; businesses filed 28,322 bankruptcies, according to the American Bankruptcy Institute.
“It’s a very complex set of negotiations that go on within the Chapter 11 process and there are very few winners,” Alexander said. “It’s not something that businesses rush to do.”
There are six different types of bankruptcies; their designations come from their location in the Bankruptcy Code Books. Chapter 7 bankruptcies, the most common filed by consumers, provide for a liquidation of assets to pay debts until the debt is fully paid or forgiven. Chapter 13 bankruptcies allow consumers to reorganize and make monthly payments to the bankruptcy court to pay creditors. If unpaid in a prescribed time, the remaining debt is forgiven.
A pre-packaged Chapter 11 is another option, Alexander said. In this instance, many of the details that go into a Chapter 11 bankruptcy are worked out before the bankruptcy petition is filed. Business bankruptcy filings are complex legal matters that require the expertise and staff of specialized attorneys. Prepackaged Chapter 11s are also complex but attempt to streamline the petition process, and can reduce the process from several years to a couple of months.
And Alexander notes that not all Chapter 11 bankruptcies are successful. Recent figures are unavailable, but only 27 percent of Chapter 11 bankruptcy cases were confirmed -- or business plans approved by a federal court -- between 1989 and 1995, according to a 1998 report from the United States Trustee Program.
There is no indication that the percentage of confirmed cases is growing, Alexander said.
“That’s another reason to think very carefully before you go into bankruptcy,” he said. “It’s not a panacea.”
There are successes, however, Alexander said, pointing to troubles within the airline industry. A majority of “legacy” airlines managed to come back from bankruptcy, “as we say, leaner and meaner, with streamlined costs and to be somewhat competitive again.”
As a bankruptcy attorney, Alexander said the situation involving the automakers is not surprising. There are ebbs and flows, where some businesses rise while others struggle in a cyclical pattern. But even with protections that a Chapter 11 bankruptcy can provide, Alexander hastens to add the situation now is much different.
“The shocking thing this time is that the whole financial world is in distress and that even in bankruptcy it may be hard for these companies to emerge from Chapter 11 because they are going to need the help of some other entities that are struggling themselves,” he said.
The situation involving Chrysler’s bailout in the late 1970s was different than what automakers today face, he said. Chrysler repaid its loan within a few years.
“Times are different,” Alexander said. “Every spin-off business is in trouble. The financial industry is in trouble. The housing market is in trouble. In 1978, it was Chrysler and a couple of selected businesses that were in trouble. Everyone’s in trouble right now and that is vastly different.”
Officials with General Motors Corp. and Chrysler have said their companies might not have the funds to operate much longer without a financial stimulus package, and Ford also needs help. Officials with each car company argue against bankruptcy, however, and cite the potential for a drop in consumer confidence that such action could bring.
Alexander recognizes those concerns. That is not the fault of the bankruptcy code but, instead, is “just part of human nature,” he said. Consumer concerns over service, dealerships and parts replacements of companies seeking bankruptcy protection could potentially plunge companies into further distress based upon public perceptions, he said.
Bankruptcies, however, can be helpful.
“It can help streamline a company; help companies renegotiate loans, renegotiate contracts including labor contracts, and emerge as a more efficient business,” Alexander said. “And to keep a business going -- even if it is smaller -- is probably better for the U.S. economy.
“Successful bankruptcies, particularly business bankruptcies, do exist. It’s just that you start with a relatively small percentage of bankruptcies being filed being business bankruptcies, and if the numbers from 10 years ago are to be believed, there’s not a large percentage of them that are successful.”
Bankruptcy filings are public record, and businesses that take that route provide opportunities for case study and insight into a specific business’s structure, why it failed, and the prospects for achieving success. The laboratory it presents offers bankruptcy teachers and students with greater insight and is a great teaching tool, Alexander said.
For more information, contact Alexander at 618/536-7711.