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Saturday, May 30, 2009

General Motors to File for Chapter 11 Bankruptcy Protection

From The Hoss's Mouth

You probably know by now that General Motors is about to file for, or has already filed for, Chapter 11 bankruptcy protection, depending on when you read this. So just what does Chapter 11 bankruptcy protection mean? Does General Motors go on welfare? Many would say they already are on welfare given the large amount of bailout money they have received.

Hoss Cents free financial money magazine will try to explain in layman's terms what Chapter 11 bankruptcy protection is and how it works.

Chapter 11 bankruptcy is a form of corporate financial reorganization. It does not mean the company dissolves. It is the usual choice for large companies such as General Motors looking to reorganize their debt. Generally, companies are permitted to continue to operate while they pay off some or all of their debt.

The US Trustee appoints a creditors committee from amongst the major bondholders (creditors). This committee negotiates with the company (in this case General Motors) in hopes of producing a reorganization plan acceptable to the creditors and to the company. The plan may cancel some of the company's debt, and it may give part ownership of the reorganized company to creditors. Any proposed plan must be voted on and passed before a Chapter 11 plan is confirmed. Votes are rated according to each creditor's total claim against the debtor (General Motors).

In the case of General Motors it has been reported that the creditor's committee has reached a deal with General Motors that would give 10% of the company to the bondholders with an option to buy an additional 15% of the company's stock. In addition, the United Auto Workers union is to receive a reported 17.5% of the restructured General Motors, with an option to purchase another 2.5% stake.

When Congress enacted Chapter 11 of the bankruptcy code it was hoped that a newly restructured company would become profitable and thereby save jobs both in the bankrupt company and all associated business. In the case of General Motors there are many companies that would be adversely affected by a total collapse of General Motors. In addition, Chapter 11 provides the creditors with an opportunity to recover more of their investment than they would if the company were to dissolve and sell off all their assets.

The Hoss hopes his explanation helps you to understand the Chapter 11 bankruptcy process.

Stay on track,

The Hoss

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