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How Chrysler bankruptcy is different

The U.S. government expects Chrysler to spend one to two months in bankruptcy under a plan announced on Thursday. But how is that possible?
/ Source: The Associated Press

The U.S. government expects Chrysler to spend one to two months in bankruptcy under a plan announced on Thursday.

But how is that possible, considering that most companies end up in bankruptcy court for more than a year, and sometimes longer? Also, what role is the government taking in the case, and how might that change the process?

Here are some questions and answers about the Chrysler bankruptcy.

Q: Does the bankruptcy filing mean Chrysler is going out of business?

A: No. Many companies file for Chapter 11 to cut costs or restructure their operations while the court keeps creditors at bay. That is what Chrysler is attempting to do — use the bankruptcy laws to get rid of some liabilities then exit court protection.

President Barack Obama said the bankruptcy will give Chrysler time to finalize a deal with the Italian carmaker Fiat Group SpA, in an effort to revive the nation's third-largest automaker.

Companies that are clearly going out of business normally file for a different type of bankruptcy known as Chapter 7.

Q: Is this the same type of bankruptcy that businesses usually file for?

A: Many businesses that enter bankruptcy do file for Chapter 11 so, yes, it's the same type.

On the other hand, some businesses will file a Chapter 11 even when they are liquidating assets — which is to say, unloading all of their stuff, and going out of business. Doing so gives them more control over the liquidation. But that does not appear to be the case here, since Chrysler doesn't plan to liquidate.

Q: Why is Chrysler entering bankruptcy even though the government had pledged financial support?

A: Even with government loans, Chrysler needed its lenders on board in order to avoid bankruptcy.

But a small group of lenders, calling themselves the "Non-Tarp Lenders to Chrysler," refused to support the government's plan for the Auburn Hills, Mich.-based automaker. By filing for bankruptcy, the government in essence called the group's bluff — since lenders are worse off in bankruptcy than outside of it.

"By filing for bankruptcy, they have significantly diminished the leverage the lenders have," said David Skeel of the University of Pennsylvania Law School.

Q: What does Chrysler need to do next, and what else will need to happen before the company can emerge from court protection?

A: First — and quickly — Chrysler needs to finalize the deal with Fiat and secure the court's approval of such a deal.

"I see the case proceeding very similarly to Lehman's," said Seton Hall Law School Professor Stephen Lubben. "The big hump is the sale hearing."

(Lehman finalized the sale of its U.S. broker-dealer business the first week after it entered court protection on Sept. 15, 2008. All of its most valuable assets have since been sold off while the case itself still drags on.)

Lubben said Chrysler's timeframe of 30 days to 60 days refers to the formation of a new Chrysler, probably incorporating its most valuable assets. The company's creditors will likely be wrangling over what's left for much longer.

Skeel said Chrysler would eventually need to decide which dealerships to shut down and how to deal with the lingering costs for pensions and health care. Some of these "legacy costs" have been negotiated already.

Q: What role is the government taking in the case?

A: The government's role in the case is unprecedented in bankruptcy history, according to Skeel.

Once Chrysler emerges, the government will hold a stake in the company and will also be one of its biggest lenders. Senior administration officials said Thursday that the government will offer up to $8 billion in loans to fund Chrysler's operations during bankruptcy and to help it emerge.

"We have had big bankruptcies before," Skeel said. "We've never had anything that looked like this, where the government is masterminding the bankruptcy."

Q: Why would the company file in New York when it is based in Michigan?

A: Chrysler chose to file in New York for one reason: predictability.

"Everybody wants to be comfortable that the process is going to go the way they expect," Lubben of Seton Hall said. The higher volume of corporate bankruptcies in New York and Delaware — and the accompanying track records — make those courts more attractive to petitioners.

Q: Will I still be able to buy a Chrysler? If I already own one, will the company honor my warranty?

A: Yes, the company is expected to operate as it did before, with Chrysler selling cars and existing warranties guaranteed through a government program. One thing to watch is the future of dealerships. Dealers could be subject to scrutiny in bankruptcy court, where the company can cancel contracts with them if they get a judge's approval.

Q: What might this mean for General Motors, which has also been teetering?

A: How Chrysler's case goes holds enormous significance for General Motors Corp., the nation's biggest automaker.

"It will tell us a lot about GM," Skeel said. "What happens in the next week or so will have a big effect on how GM files."

If Chrysler's case goes smoothly, he said, expect GM to follow pretty quickly with its own bankruptcy filing.

Lubben agreed GM could file within the next few weeks, and said Chrysler's case was a harbinger of things to come.

"This is kind of the mini version of GM," he said.