What Chrysler's Bankruptcy Filing Means: A Primer.
A Primer on a Chrysler Bankruptcy
By MICHELINE MAYNARD
Chrysler is the first major automaker to file for bankruptcy and attempt to reorganize since Studebaker in 1933. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Will Chrysler cease to operate?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to leave bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” which it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steelmaker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization for only 18 months. A judge can extend this period, which is called exclusivity, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that will happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler would continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making loans for Chrysler vehicles; GMAC, with support from the government, will provide financing for Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not anticipate any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a mini-trial on the subject and hear both sides. If pensions are terminated, employees would still receive about one-third of their benefits through funding from the federal pension agency.
A company also can eliminate retiree health care benefits for non-union employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler can ask to cancel suppliers’ contracts and grant business to new suppliers, or seek lower rates. Suppliers would have the opportunity to negotiate with the company, just as they would in any business deal.
By MICHELINE MAYNARD
Chrysler is the first major automaker to file for bankruptcy and attempt to reorganize since Studebaker in 1933. The process can be complicated. Here is a quick look at how it is likely to play out.
Q. Will Chrysler cease to operate?
A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to leave bankruptcy, these companies are reconstituted as new legal entities.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.
Q. How long will this take?
A. The Obama administration spoke of a “surgical bankruptcy” which it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.
In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steelmaker, took seven years to resolve.
Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization for only 18 months. A judge can extend this period, which is called exclusivity, but creditors or potential buyers for a company can present a competing plan once that period expires.
Q. What happens to Chrysler dealers?
A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that will happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler would continue to provide dealers with vehicles to sell.
Chrysler Financial will cease making loans for Chrysler vehicles; GMAC, with support from the government, will provide financing for Chrysler dealers.
Q. What happens to Chrysler employees?
A. The White House said it did not anticipate any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,
Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.
But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.
Q. Are pensions and retiree health care benefits protected?
A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a mini-trial on the subject and hear both sides. If pensions are terminated, employees would still receive about one-third of their benefits through funding from the federal pension agency.
A company also can eliminate retiree health care benefits for non-union employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.
Q. What happens to Chrysler suppliers?
A. The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.
Chrysler can ask to cancel suppliers’ contracts and grant business to new suppliers, or seek lower rates. Suppliers would have the opportunity to negotiate with the company, just as they would in any business deal.
Labels: Automobile manufacturing, Economic news, Political economics
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