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What Would a Chrysler Bankruptcy Mean For You?

Big 3 automaker bust could have far-reaching repercussions

By Mark Huffman
ConsumerAffairs.com

April 24, 2009

• Auto Bailout Chief: GM's CEO Had To Go • Taxpayers Unlikely To Recover Full Auto Industry Investment • GMAC Changing Name to Ally Bank • New Car Sales Show Improvement From May • April Dismal For U.S. And Foreign Carmakers • Chrysler Files for Bankruptcy, GMAC Takes Over Financing • Auto Sales Stagnant, But Hope Appears • What Would a Chrysler Bankruptcy Mean For You? • U.S. Carmakers Getting More Federal Aid • GM Cuts More Jobs, Eyes China • New Car Sales Plunge in February • Car Buyers Seeking Higher Fuel Economy • Video: Do Women Really Hate Car Shopping? • GM Plans New Minicar, Electric Cadillac • GMAC Becomes a Bank • White House to Loan Carmakers $17.4 Billion • Chrysler Closing Car Plants for 30 Days • What Would a Washington-Designed Car Industry Look Like? • States Want Stronger Used Car Rule • Industry Troubles Cloud LA Car Show • Carmakers Get Neither Love Nor Money From Congress • Taxpayers Headed For Automotive Bailout • Time May Be Running Short for U.S. Carmakers • Feds Move Closer to Carmaker Bailout • New-Vehicle Buyers Turn to the Web in Record Numbers --- • More about Auto Sales ...

Embattled U.S. carmaker Chrysler appears headed for Chapter 11 bankruptcy. A number of sources in Washington, including Sen. Debbie Stabenow (D-MI) say the company is being prepared for that step. Stabenow, in an interview with Bloomberg News, says the company and the U.S. Treasury are "preparing for all options."

What does the possibility of one of the world's largest automakers going bankrupt entail?

First, it's important to make a distinction. A Chapter 11 filing would only mean the company would be allowed to reorganize under the protection of a bankruptcy court. Some commitments that are currently binding on the company — such as loan agreements and labor and supplier contracts, could be altered or rendered null and void. But the company would continue to do business.

That's very different from a Chapter 7 bankruptcy filing, which is a liquidation. In a Chapter 7 filing, assets are sold off and the company goes out of business. According to officials in Washington, that's not on the table with Chrysler.

One of the auto industry's strongest arguments against bankruptcy has been the fear that consumers would consider a bankrupt carmaker a damaged brand, and would avoid buying its products. President Obama last month seemed to anticipate that argument when he announced the government would guarantee American car warranties.

If a consumer purchases a car from a company in bankruptcy Obama said the consumer can rest assured that the new car warranty will be honored. If the company cannot or will not honor it, the President said, the U.S. Government would.

However, there are some exceptions. Clarence Ditlow, executive director of the Center for Auto Safety, says the plan doesn't cover vehicles purchased before a company goes bankrupt. It also doesn't cover safety recalls, he said.

A Chrysler bankruptcy would perhaps have the largest impact on bond holders and dealers. A bankruptcy could reduce the interest paid on bonds, or even wipe them out all together. It could also change agreements with car dealers that have been in place for decades.

The Wall Street Journal reported this week that a Chrysler bankruptcy might make the company more attractive to Fiat, which is negotiating to buy the U.S. carmaker. In a bankruptcy, the Journal reports, Fiat would have more leeway to purchase only the Chrysler assets that it wants.

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