Q&A: Automaker Bankruptcy

(AP)  As much as they hate the idea, one or more of the big U.S. automakers might end up filing for bankruptcy as they struggle with growing debt, plummeting sales and a tough sell on a rescue package they want Congress to pass.

Leaders of Ford Motor Co., General Motors Corp. and Chrysler LLC have said they don't consider bankruptcy a viable option, since it would destroy potential customers' confidence in the companies. But they also say they're burning through millions of dollars every day, and they need help from the federal government.

If one of the Detroit Big Three does file for bankruptcy, the impact could trickle down in several ways to the people who buy their cars. Joe the Chevy driver may not get as much money if he sells his car. His auto dealer might shut down. And replacement parts could become harder to find.

Here are some questions and answers about the potential impact of an automaker bankruptcy on car owners.

First of all, what sort of bankruptcy filing would these companies make?

It likely would be what's called a prepackaged Chapter 11 filing. That allows the company to continue doing business while renegotiating contracts and terms to gain some financial breathing room from its debt.

The prepackaged part means the company has already negotiated some of the terms before it files anything in court. Corporate bankruptcy attorney Alan Mills says he doesn't think any of these companies are considering a Chapter 7 filing, which would essentially put them out of business.

If they're going to renegotiate everything, what does that mean for the warranty on my new car?

Probably nothing. These carmakers already may see a drop in business simply because they filed for bankruptcy. They can't afford to alienate any existing customers by messing with their warranties.

One of the first goals for companies in a bankruptcy proceeding would be making sure they have the authority to honor warranties, Mills said. Even carmakers that stop producing a certain model will still honor the warranty on that model.

But what about that sweet, zero-percent financing deal I landed on my new car, or the rebate I've been promised?

See above. Honoring those agreements will become a priority for the carmaker.

"Your terms are going to be your terms unless they want to lose customer base," Mills said.

How would a bankruptcy filing affect the value of my car if I want to sell it or trade in for something else?

Here's where Joe the Chevy Driver may get pinched. People may avoid the brands of a bankrupt carmaker because they will worry about warranties or the availability of parts and service down the road.

This could be a problem especially for cars that are only a couple of years old and still have some warranty coverage, said Paul Taylor, chief economist for the National Automobile Dealers Association. Cars that are five to 10 years old pose less of a risk for the buyer because they have less money at stake.

Will I be able to get parts for my car if the manufacturer files for bankruptcy?

Business likely will go on as usual during a restructuring. But in some cases, a carmaker and parts supplier may not be able to agree on new terms or a renegotiated contract. That could lead to some disruption in parts supplies.

Does that mean my repair bill could rise?

In some cases, yes. It may take longer to make repairs, and it may cost more because the mechanic might have to search for another parts supplier.

Will I still be able to find parts several years down the road?

Carmakers are expected to keep an adequate supply of service parts available through the expected life of a car. Those are parts made specifically for a given make and model. That could change with a bankruptcy, and some parts may become harder to find, said Ron Pyle, president of the Automotive Service Association.

However, there will always be after-market parts. But these aren't made under a contract with the carmaker, and they could be designed to fit more than one car. That means they may not fit or function perfectly for your car.

How would my car dealer fare through a bankruptcy?

The dealers, whose sales have already slumped in a down economy, could see even more pain if potential customers are scared off by an automaker's bankruptcy filing.

Bankruptcy may also allow carmakers to cancel franchise agreements that are normally protected by state laws. That may make it easier for them to reduce the number of dealers selling their brands.

What about recalls?

The National Highway Traffic Safety Administration has said a bankruptcy filing wouldn't discontinue a carmaker's obligation to recall anything that's defective, and the government agency would go to bankruptcy court to argue that point.

By Tom Murphy

[brianbwb-2009]

It finally came back and bit them. What goes around...

We Detroiters, back in the 70s, watched the Big Four (at the time) lay off thousands of workers weekly. We watched them close plant after plant, then watched as the steel industry, and the other support services followed, creating a recession that rippled, like waves in a pond, to all of America.

We watched as idiots like Reagan pointed to your short-term gains as a sign that America was in recovery, (the "jobless recovery", as it has since been named) and his trumpeting of the twisted economic corruption he called "trickle down economics" as the explanation. We watched Reagan essentially declare war on labor, begin to remove regulations that protected us from economic regression, and lie through his teeth that all was well.

Then we watched the lizard Newt "Contract on America" Gingrich and his gang of sociopaths gut every program designed to help Americans cope with the effects of your social treason, and watched as Democrats passively accepted your lunacy, too spineless to stand up to the loudmouth spewing of neo lunatics.

Watching this happen, our question was, if these working people, who are the core of the middle class, lose their jobs, then who is going to buy the product? The logical answer was that the automakers didn't care about that one, they thought they could sell enough higher-priced cars to the rich, and the fleet rental market to make money.

We argued that sooner or later the automakers would kill off their own market, but no one was listening, as the stock value gained short-term, on the saved labor costs. Well I hope that those who still hold stock are happy with the short term profits they made, because it all ends now. The Big Three (now) proved us correct, they killed their own market, and damaged the entire US economy at the same time.

We hate to say it, (but only because working families who depended on you for their living are now suffering because of your greed and shortsightedness) but we told you so.

[edamos54]

for Ramos937 - Excellent points. The three of them
should be lining up at the Chapter 11 store waiting
for the new day to dawn.

[tmittelstaed]

People are always going to be heavily swayed by price - if a new Chevy was selling for $12K that any equivalent vehicle from any other automaker (including an import) would sell for $20K, then Chevy would be selling them hand-over fist.

The automakers are in for a rude shock - and that means all of them, imports included. Look at what happened to the computer industry. The original IBM XT sold through a dealer for $5K. Today, a typical PC sells through retail for $500. This change destroyed the computer dealer network but over time people adapted.

I can easily see a carmaker basically producing a cheap car built almost entirely by robotics and minimum wage employees, with nothing more than a 3 month warranty, and sold via a stripped down "vehicle depot" where there is no salesperson, and you just show up and pick up your car and drive it off. Once past the warranty period your on your own in fixing it - you take it to a 3rd party mechanic. How low could they sell it? $4,999.00? I''d bet if it was that cheap people would be buying them in droves.

Bankruptcy would allow a domestic automaker to do something like this.

[debinok1]

Actually both are bankruptcy, Ch 11 is a restructuring bankruptcy, Ch 7 is a liquidation of assets bankruptcy. Chrysler and GM have said it is unlikely they would qualify for a Ch 11 and be forced into a Ch 7, Ford thinks it could stand through a Ch 11 bankruptcy if it files alone, but if all 3 are forced to file it makes it unlikely that Ford would acheive Ch 11, still not 100% sure why that is, unless part of their assets are tied up in GM and Chrysler. Ch 11 restructure would be best for all concerned, IMO, however the doomsayers disagree.

[ramos937]

I really believe Mr. Murphy is incorrect when he says Chapter 11 is bankruptcy. Chapter 7 is bankruptcy.

I wonder if someone will ask, in public, the big 3 why it is that when Chrysler went into Chapter 11 in the late 1970s, it managed to come out of Chapter 11 better, smaller, leaner and healthier?

BTW, a number of companies have undergone Chapter 11 that were still solvent only because they wanted to protect certain assets. Also, a number of airlines have emerged from Chapter 11 better than when they went in.