Bailout with a price: Chapter 11 bankruptcy
By JIM KUHNHENN
Associated Press
November 20, 2008
WASHINGTON (AP) -- Mention a corporate bailout in the nation's capital these days and chances are someone will offer a harsh condition to go along with it. Chapter 11 bankruptcy.
Lately, the term "prepackaged bankruptcy" has been gaining currency in the halls of Congress as lawmakers struggle with pleas for help from the auto industry.
The idea, embraced by some Democrats and Republicans, would extend taxpayer help in exchange for a company undergoing an accelerated Chapter 11 reorganization. The arrangement could represent a model, or a deterrent, for any other strapped companies considering seeking government help.
Bankruptcy protection has worked before to turn debt-saddled companies in the steel, airline and retail industries into leaner and meaner successes. But a frozen credit market and the rigors of a Chapter 11 reorganization make it a difficult option for struggling companies and an unpalatable solution for many lawmakers.
For now, the talk has centered on Detroit's beleaguered automakers.
Company executives have spent the last two days fruitlessly pleading their case in Congress for at least a $25 billion bridge loan to pull them out of a near-death spiral. To a man, the Big Three executives rejected the idea of filing for bankruptcy even as some lawmakers began to warm to the concept.
Late Wednesday, the Senate canceled a showdown vote on an auto bailout package. But the idea of linking future aid to an accelerated bankruptcy protection plan did not die with it.
"I'm very much attracted to the prepackaged bankruptcy idea," said Senate Banking Committee chairman Christopher Dodd, D-Conn., who held hearings Tuesday on a bailout. He was referring to a method of seeking Chapter 11 protection whereby a company would negotiate plans with creditors before filing for bankruptcy, thus speeding up the process.
Simply put, a Chapter 11 bankruptcy lets a company stay alive by paying off creditors over time, retaining control of its assets and reorganizing. In the process, they raise capital, downsize and renegotiate contracts to stay alive.
It's what United Airlines did in 2002. The company filed for Chapter 11, shrank its fleet, cut 26,000 jobs and reduced wages for the rest of its work force. In 2006, it successfully emerged from bankruptcy protection.
But the current financial crisis has changed the bankruptcy terrain. With the credit markets frozen, companies would not find easy access to financing. That's why, even as some lawmakers insist that General Motors file for bankruptcy, they acknowledge that federal aid should be part of the package.
New York bankruptcy lawyer Mark Bane recommends that government assistance would serve best during the prepackaging process, leveraging the company's negotiations by setting an expiration deadline on the aid.
Still, bankruptcy is tough medicine. While creditors, suppliers and management take a hit, so do a Chapter 11 company's workers. Besides cutting jobs, pay and benefits, United Airlines also eliminated its pension plans.
Labor unions wince at the idea. Testifying before Congress last year, AFL-CIO Treasurer Richard Trumka decried a bankruptcy system that he said "has become effectively a device for the wholesale transfer of wealth from workers to other creditors."
>> Continued -- Page 1 2
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
| 
