President Obama has announced that Chrysler has declared bankruptcy. While this sounds ominous, it means the company can continue to operate, since this is a Chapter 11 Reorganization, not a Chapter 7 Liquidation. GM will almost certainly follow the reorganization route too.
How is Business Bankruptcy Different from Personal Bankruptcy?
Businesses go bankrupt just like individuals. If a sole proprietorship goes bankrupt, this bankruptcy is probably tied to personal bankruptcy. But a business organized as a limited liability company, partnership, or corporation can declare bankruptcy without affecting the personal financial status of the owners and shareholders. Here are some questions you might be asking about Chrysler's bankruptcy:
What is Chapter 11 Bankruptcy?
Under Chapter 11, the company continues under court order, with a manager in place. The manager will oversee operations, along with Chrysler's own management. Several committees will be formed, one to work with creditors and bondholders, possibly another committee to represent employees, and another to represent stockholders. The committees will work out who gets paid back, how much, and when.
What about the Creditors?
When a company declares bankruptcy, the bankruptcy laws state specifically the priorities of creditors (those to whom the company owes money), including both secured and unsecured creditors, employees, and unpaid taxes.
What about the Shareholders and Bond-holders?
If you are holding bonds of a company like Chrysler which declares bankruptcy, bond-holders will stop receiving interest and principal payments. Stockholders, on the other hand, are at the bottom of the proverbial totem pole. The company's stock may continue to be traded, although no dividends will be paid. In some cases, the stockholders may get new shares in the reorganized company. These shares may or may not be able to be redeemed or traded.
For more information on the details of the Chrysler bankruptcy, read Aaron Gold's excellent blog post on "Chrysler Declares Bankruptcy: Now What?" on Cars.About.Com.
If you have any other questions about business bankruptcy, post them on the Forum.