Chrysler, GM and the Future of Chapter 11

Abstract:     
Although they caused great controversy, the Chrysler and GM bankruptcies broke no new ground. They invoked procedures that are commonly observed in modern Chapter 11 reorganization cases. Government involvement did not distort the bankruptcy process; it instead exposed the reality that Chapter 11 offers secured creditors - especially those that supply financing during the bankruptcy case - control over the fate of distressed firms. Because the federal government supplied financing in the Chrysler and GM cases, it possessed the creditor control normally exercised by private lenders. The Treasury Department found itself with virtually the same, unchecked power that the FDIC exercises with respect to failing banks. The Chrysler and GM bankruptcies are cautionary tales about Chapter 11, not about government intervention. It may be time to entertain longstanding proposals for reforming the reorganization process.

Number of Pages in PDF File: 13

Keywords: corporate reorganization, bankruptcy, Chapter 11, Chrysler, General Motors

JEL Classification: G18, G30, G34, G38, K20, K22, K29, L62

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