President Obama announced the Chrysler bankruptcy on April 30, 2009. While bankruptcy sounds ominous, it means the company can continue to operate, since this is a Chapter 11 Reorganization, not a Chapter 7 Liquidation. While big corporate bankruptcies are different from those of personal bankruptcy and small business bankruptcy, there are some similarities.
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 or trustee in place. The trustee 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. The trustee's job is to oversee company operations to assure that creditors get paid what they are owed, so they will continue to work with the company and it can keep operating.
What about the Shareholders and Bond-holders?
Bond-holders will stop receiving interest and principal payments. Stockholders, on the other hand, are at the bottom of the proverbial totem pole and may not receive anything. 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.
