A Practical Look at Chapter 11 For General Motors -- Analysis From Leading Economists

News Type: Opinion — Seeded on Thu Nov 20, 2008 8:29 AM EST

Article Source: Voxeu.org

business, bankruptcy, general-motors, chapter-11, primer, warranties

"First, financing must be available during the restructuring....
Second, the financing must aim to minimise the risk the company remains passive and continues wasting resources....
Third, the GM bankruptcy must avoid setting off a costly chain reaction of other bankruptcies. In particular, the bankruptcy of related suppliers must be avoided....
Fourth, GM must emerge from Chapter 11 as a smaller company....
Fifth, GM must emerge from Chapter 11 without massive pension obligations....
Sixth, GM must emerge from Chapter 11 without enormous retiree medical care liabilities....
Finally, the bankruptcy plan would have to address perhaps the biggest challenge of a Chapter 11 filing: the risk that the customers will desert GM because of concerns about the value of its car warranties.... To avoid this problem, we propose that GM be required to purchase insurance for its warrantees, and to do so in such a way that its incentives to improve quality are not diminished."

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This is a practical overview of the Chapter 11 bankruptcy process for General Motors. It doesn't address all issues, but the economists have excellent and practical ideas for GM emerging successfully from a Chapter 11 Bankruptcy. In a Chapter 11 proceeding, there are a variety of motions that are made the moment the bankruptcy is filed. They are called "First Day Motions." The bankruptcy judge assigned to the case would address such immediate issues as: 1) maintaining their key and critical vendors; 2) paying salaries of their employees, including the chief officers of the company; 3) keeping all the lights on at all their facilities; 4) establishing their Debtor in Possession accounts or maintain their existing accounts; and 5) establishing Debtor in Possession ("DIP") financing if they have creditors willing to loan them funds. The DIP financing normally grants the new creditors first lien rights and subrogates existing creditors with security in assets. The purpose for moving the new creditors ahead of others is the incentive for the new cash infusion.

The Motions would be filed with the filing of the petition, and the judge would hear the motions within days, or hours, of the actual filing.

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#2 - Thu Nov 20, 2008 8:47 AM EST

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A Practical Look at Chapter 11 For General Motors -- Analysis From Leading Economists

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