Chrysler, GM Bankruptcy Looming in Detroit

03/12/2009 05:12 am ET | Updated May 25, 2011

The government may force General Motors and Chrysler into bankruptcy to assure the taxpayers get back their $17.4 billion in bailout loans.

The car companies, of course, say such a move would destroy them.

Bankruptcy may be necessary, because, as Bloomberg points out:

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury's Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their place in line for repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called "debtor in possession" or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

The possible bankruptcy isn't news to Congress. According to a document unearthed by The Truth About Cars, Congress had received a report back in December detailing how the bailout would likely fall short.

A bankruptcy of the Big 2 could also spell disaster for Ford. According to BloggingStocks, a Chapter 11 filing would mean that many auto part suppliers would only be paid a portion of what they were owed, and would themselves be forced into bankruptcy. This would hurt Ford, because many of the firms from which it receives its components will be wiped out.

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