updated 11/2/2009 11:04:07 AM ET 2009-11-02T16:04:07

Lender CIT Group has filed for bankruptcy protection, in an effort to restructure its debt while trying to keep loans flowing to the thousands of mid-sized and small businesses.

On Monday, CIT Group Inc's bankruptcy case was assigned on Monday to U.S. Bankruptcy Judge Robert Gerber, the same judge who oversaw the recent reorganization of the automaker General Motors Co. Gerber, a bankruptcy judge since 2000, is no stranger to large complex cases, having also handled the bankruptcies of cable TV operator Adelphia Communications Corp and the current proceedings involving Lyondell Chemical Co.

CIT made the filing in New York bankruptcy court Sunday, after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders have overwhelmingly approved a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to continue to do business.

"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," said Jeffrey M. Peek, chairman and CEO. Peek has said he plans to step down at the end of the year.

CIT's move will wipe out current holders of its common and preferred stock, likely meaning the U.S. government will lose the $2.3 billion it sunk into CIT last year to prop up the ailing company. The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.

The bankruptcy protection filing is one of the biggest in U.S. corporate history. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. Its collapse is the latest in a string of huge cases driven by the financial crisis over the past two years, as bailed out industry heavyweights like General Motors and Chrysler both entered bankruptcy court.

CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.

It received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

It is unclear what the filing will mean for the nation's small businesses, many of which look to CIT for loans to cover expenses like buying materials at a time when other credit is hard to come by.

Analysts have warned that already ailing sectors, like retailers, could be hit especially hard, since CIT serves as the short-term financier for about 2,000 vendors that supply merchandise to more than 300,000 stores.

In morning trading, CIT shares fell 41 cents, or 57 percent, to 31 cents. The New York Stock Exchange said it would suspend trading in CIT prior to Tuesday's market open.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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