There's Bankruptcy and There's Bankruptcy

For political purposes, there seems to be a blurring of the definition of bankruptcy in order to make the auto makers sound as if they will completely go out of business unless they get government funding. You hear comments by some Democratic lawmakers that 3 million American jobs are at stake if the U.S. auto companies fail. That would be true if they did completely fail. However, nothing could be further from the truth in this particular situation.

First and foremost, nobody is talking about Chapter 7 bankruptcy as defined by Title 11 of the United States Code. In a Chapter 7 bankruptcy, a company ceases to be; although, in some cases, a division may be spun off and allowed to continue operations and the funds for selling that division would be used to satisfy any indebtedness of the primary company. The process by which the company is dissolved is governed by the details of this code so that the former company's debtors are fairly dealt with. All operations are ceased and a trustee is appointed to distribute all remaining assets. If the auto companies did file for Chapter 7, then certainly, 3 million jobs would be lost.

However, the form of bankruptcy protection that would be appropriate for a corporation like GM, Ford, or Chrysler who are struggling under contracts and debt is identified as Chapter 11 bankruptcy as defined by Title 11 of the United States Code. This form of bankruptcy prevents debtors from filing suit against a company in order to obtain any complete resolution of what they are owed. Further, it affords a corporation the ability to reorganize and renegotiate all contracts to levels that are more practicable for continuing operations. The whole process is overseen by a Federal court. In essence, the company continues to operate. In this case, cars and auto parts would continue to be sold and dealerships would remain in business. Most definitely, there would be no 3 million jobs being lost.

Sadly, the process of keeping the auto companies alive has been taken out of the realm of reality and practical business tactics, and has been put squarely into the B.S. of Congressional politics. Nobody wants the auto companies to completely go under. But the politicians (especially those indebted to the United Auto Workers Union) are making it sound like there are only two choices: (1) go out business or (2) get the money. Unfortunately for all Americans, this kind of lying is what we consistently get from our politicians.