To the generations who grew up playing Monopoly, "bankruptcy" often means "game over". But that isn't always the case. The purpose of a Chapter 11 bankruptcy filing is basically to give businesses shelter from the storm while they find a new and profitable way to run their operation.
What is bankruptcy?
Businesses seek bankruptcy protection when they no longer have enough money to cover their debts. If there is no hope of recovery, the owners can throw in the towel by filing for Chapter 7, otherwise known as liquidation, in which the business closes, the assets are sold and the proceeds go to pay off the company's creditors (the organizations to which the business owes money). If the business has a good hope of surviving, it can file for Chapter 11.
Chapter 11 bankruptcy: Keeping the doors open
The most important thing about Chapter 11, the type of bankruptcy filed by Chrysler, is that the business continues to operate during bankruptcy proceedings. Remember all the airlines that kept flying after declaring bankruptcy? It's the same thing for an automaker -- after filing for Chapter 11, they continue to sell and service cars and honor warranty claims.What happens when an automaker files Chapter 11 bankruptcy
Chapter 11 bankruptcy is known as a reorganization. The business is given temporary relief from its debts, and in most cases the current management (as opposed to a court-appointed trustee) stays in charge of day-to-day operations. Chapter 11 requires the company to come up with a reorganization plan which must be approved by the bankruptcy court. The plan determines how creditors will be paid off and how the company can be restructured to run profitably. In some cases, creditors will be given some say in the business plan. Chapter 11 also allows the company to be released from contracts (such as labor, supplier or dealer contracts) that are causing a heavy financial burden. Bankruptcy proceedings can take anywhere from a couple of months to a several years, and if all goes well the result is a healthy company that can pay off its debts while operating profitably.
Automakers: A special case
Because the auto industry is such an integral part of America's economy and society, and because the federal government is one of the automakers' creditors, special provisions can be made to ensure a quick and effective reorganization. For an example of how an automaker bankruptcy is structured, read About the Chrysler bankruptcy.
