Bankruptcy is a very scary word. For many of us, it conjures up images of financial devastation and companies going out of business for good.
So when we talk about bankruptcy and the three biggest auto companies in America, we become afraid that if they file for bankruptcy they will disappear forever. That is just not the case.
The fact is, GM and Chrysler are already bankrupt. They are out of money, all that’s missing is the formal filing.
If any of the Big 3 were to file for bankruptcy, they’d file for chapter 11. Cases filed under chapter 11 of the bankruptcy code are sometimes referred to as “reorganization bankruptcies” because it lets the company stay in business while changing the way they operate. A judge decides how and when debts are repaid.
Reorganization is what the Big 3 need, along with getting out of their current financial obligations such as labor costs, executive salaries, union workers benefits, dealer agreements, etc. Right now, it’s those union agreements that are resulting in a financial loss for every car sold. Logically that can’t continue.
A financial bailout would provide money to the automakers to continue business as usual, but provide little incentive to actually restructure. Chapter 11 bankruptcy would be like wiping the slate clean and starting over, continuing business while reorganizing.
For consumers, warranties would stay in effect and dealers would continue selling and servicing cars.
Of course there are consequences to filing for bankruptcy, one of which is consumer confidence. Given the choice of a bankrupt auto maker and a financially sound one, the decision may not take people long.
Considering though that GM and Chrysler are already out of money and in desperate need of cash, are you in favor of bankruptcy or bailout for the automakers?