Like a couple of months ago when Chrysler filed for bankruptcy, this week brought another moment to an essential American industry that did not really come as a surprise, but still sent shockwaves through the economy that are certain to be felt for a long time to come. Another of the “big three” auto makers in the United States, General Motors Corporation, filed for Chapter 11 bankruptcy protection. The company now will begin a process of reorganizing itself from top to bottom, with changes in ownership, credit owed, and even merchandise that will be placed on the market all being certain consequences of the bankruptcy. If you have always been a loyal purchaser of GMC products, you may need to be prepared for the reality that your favorite vehicle may no longer be on the lot the next time you visit your local dealership. Instead, as sanctioned by the deal brokered by the federal government, perhaps you instead will find yourself going for a test drive in an energy-efficient car. As we know from the countless media reports, Chrysler and GMC are far from alone in its dire financial circumstances. Many other well-known companies, from Mrs. Fields Cookies to Linens ‘n’ Things to KB Toys, have all filed Chapter 11 over the past couple of years.
It certainly is not just these large, marquee corporations that are feeling the effects 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 that have been forced into the position of filing Chapter 11 paperwork. In the first quarter of 2009, the number of Chapter 11 filings in the Lone Star State doubled from the same period the previous year, from a total of 129 up to 259. Wall Homes Inc., based in San Antonio, filed for Chapter 11 in January. Introgen Therapeutics, Inc., based out of Houston, made its decision to claim bankruptcy official at the end of last year. That same month, Texas-based Pilgrim’s Pride also filed a voluntary position for relief. These recent filings demonstrate just a few examples of how business owners in Texas are struggling and taking the drastic steps needed to remain afloat.
What exactly is Chapter 11 bankruptcy and what are the repercussions that a company can expect to face once the paperwork is officially in the hands of the court? While this option is available both to businesses and individuals, Chapter 11 is most commonly known as “reorganization” of a corporate entity. This is unlike the Chapter 7 process of liquidation of assets with which most people are already familiar, and a topic on which I wrote an article last week. Chapter 11 can be filed in bankruptcy court either through a voluntary petition by the debtor who realizes the need for restructuring or the petition may be involuntary, which occurs when creditors step in and demand legal recourse. The federal Bankruptcy Code requires the debtor or another interested party to develop a plan for addressing the needs of the creditors, with the period given to produce a reorganization proposal usually being 120 days. This plan must be agreed upon by the bankruptcy court and the company’s creditors. A United States trustee is assigned by the court to make sure that the plan is followed and to provide oversight of the company’s efforts moving forward. As it is usually in the best interest of creditors for the bankrupt company to keep its doors open to consumers, the debtor is able to remain in possession of its assets and continue to operate the business. Debtors may be able to emerge from a Chapter 11 bankruptcy in as little as a few months or within several years. In some instances, however, a productive reorganization never occurs at all. Chapter 11 filings having 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 auto maker provides a great example for a better understanding of Chapter 11 bankruptcy. Before bankruptcy, Chrysler and GMC had been in negotiations for months with its primary creditors in an attempt to reach a payment agreement without the need for bankruptcy. When these efforts were unsuccessful, the Chapter 11 paperwork was filed.
Regarding the Chrysler bankruptcy, the Treasury Department will supply Chrysler with $8 billion in new loans, on top of the previous $4 billion given as part of the earlier bailout. This money will allow Chrysler to function while working through bankruptcy, as well as operate without interruption once the company is able to exit bankruptcy. Once Chrysler emerges from its Chapter 11 status, the United Auto Workers will own 55% of Chrysler and the car maker Fiat will own a 20% stake with the option of increasing it to 35%. The United States government, also known as the American taxpayers, will own 8% of the company and even Canada, which has fronted some loan money to Chrysler, will have a 2% stake. The workers will feel the effects of this week’s decision, as all plants are scheduled to shut down starting on Monday and stay closed until Chrysler comes out of bankruptcy. Under the agreement, these men and women will receive around 80% of their normal pay through unemployment checks and union benefits.
These negotiations recently completed by Chrysler, with the proposed resolution now in the hands of a federal bankruptcy court, are similar to those currently underway by businesses across Texas. While the option of having your debts reorganized and partially forgiven while still maintaining the ability to stay in business seems quite appealing, and often is the best alternative for a struggling company, the consequences to your creditors, your company’s composition, and your good name are quite real. If you are a business owner and you are considering a Chapter 11 bankruptcy filing, detailed and attentive legal counsel is essential. There are attorneys who practice solely in the area of bankruptcy law and their expertise will be needed as you navigate through this process and hopefully come out a more profitable and healthier company on the other side. Do not make the mistake of taking the first step on the Chapter 11 road without having a knowledgeable lawyer by your side.