I know many people in Michigan and elsewhere are waking to the news that Chrysler is filing for bankruptcy protection. You will hear very little information on the bankruptcy process, so as a creditors' attorney who does some work in bankruptcy courts, I thought I might give the DKOS community a little Chapter 11 primer. More below the fold.
First of all, the notion that a company that files for bankruptcy is toast is not accurate, particularly if the debtor files for what is called "Chapter 11". While certainly a bankruptcy filing can make collection of a debt more challenging, and many bankruptcies do end in full discharge of debtors without any payments to creditors, there are many creditors in certain situations that want debtors to file for bankruptcy so that there is a court process overseeing the payment of creditors and the process by which debts are paid. Furthermore, often reorganization of a debtors finances and operations with counsel may make it more likely that a debtor's business will survive.
It is certainly not an automatic death sentence. It is a little more like a stroke. It can be deadly, but if caught early enough, the blood flow can be regenerated and the blockages cleared and the person may come out of it completely and live a normal life. But it is serious.
So Chrysler is filing "Chapter 11", according to news reports. What does that mean? Well, the bankruptcy code has several chapters, and the chapter numbers have been used as a shorthand for the different types of filing. The chapters most frequently discussed are Chapter 7, 11 and 13. There are others, but these are the main ones.
In a corporate bankruptcy, typically you'll find them choosing between Chapter 7 and Chapter 11 at the initial filing. A Chapter 7 bankruptcy is liquidation. What this means is that a trustee is appointed, somewhat like a receiver, to collect the assets of the business and liquidate the business assets. This is where the business has no hope of re-emerging, and the assets are not worth managing to see if the business can survive.
A Chapter 11, on the other hand, is a reorganization. The reasons to file a Chapter 11 are many. It could be, as alleged by the administration in the Chrysler situation, you have secured creditors that are not willing to modify the terms of a loan, or accept less than face value on an obligation. It could be because a creditor has frozen some income stream or seized a bank account.
Nonetheless, Chapter 11 is not always a death knell for a business, it is usually done to force creditors to take less and/or attempt to sell off non-performing divisions free and clear of liens/security issues to focus on performing divisions. A successful Chapter 11 reorganization usually will involve a restructuring of its financial arrangements and/or a sale of the assets as a going concern. Essentially, a Chapter 11 buys a debtor time to figure these issues out.
Notably, a Chapter 11 is popular with businesses because it does not involve an automatic trustee/receiver to be appointed. In Chapter 11, the debtor remains in possession of its assets, but it has an obligation to the creditors as a whole. It is usually an expensive proceeding, so there is risk in rolling the dice, and often legal fees chew up capital, so it is frequently misused by debtors not "facing reality". But in large complicated bankruptcies like Chrysler no doubt will be, this has likely already been factored in. This is why companies like Chrysler need to "prepare" for the bankruptcy filing, as it may involve significant coordination to maximize the value of the debtor's estate.
If you are an employee of Chrysler, the good news is that you may have a priority claim for your wages. Now this is a limited amount, and it is after security. Likely, Chrysler's lawyers have already prepared motions to allow cash collateral of Chrysler to be used to pay existing wages under the authority of court order and will likely not be disrupted. Pension plans are protected by ERISA and are trust funds often held separate from the assets of the debtor estate. While ERISA often protects existing funds in the pension plan since it is a separate trust fund, the issue with pensions in a Chapter 11 is likely what obligations the company will need to do with FUTURE pension payments in the plan. Often the court will deal with these issues with all pensioners together, but you will likely need to pay attention to see what the plan includes. In large bankruptcies like Chrysler, if there are changes to the plan, very likely you will be notified. But if not, Chrysler will probably have HR personnel to explain the changes to you once they have been ordered by the court. Also, since Chrysler has a collective bargaining agreement, if you are a union worker, these negotiations will likely be dealt with through the union.
The Chapter 11 debtor in possession is not able to just run the business as it had before. There are specific reporting requirements to get the benefit of bankruptcy court protection, and there are many things that a court will require "mother may I's" that would not happen otherwise. Also, the creditors have a voice in what is being done. Also, in order to remain in Chapter 11, the debtor in possession is required in a certain time period to propose a Chapter 11 "Plan", which will be voted on by the creditor classes. If the debtor cannot secure the votes necessary for the plan, the creditors themselves can offer their own which may be more favorable to their interests. So the debtor cannot just ignore the creditors, it has to work with them, but a single creditor in a Chrysler situation is a lot less likely to impose its will on the remaining classes.
It should be noted that if the Chapter 11 is not producing results, and/or no plan seems likely, a court may order that the Chapter 11 debtor in possession bankruptcy be converted into a Chapter 7. Essentially, then, a trustee is appointed to liquidate the assets, likely an auction of the assets to the highest bidder with the proceeds going to the creditors in the order set out in the bankruptcy code.
There is obviously much to it, but I thought some highlights might help put the filing into perspective.