This week GM filed for Chapter 11 bankruptcy in federal court. This bankruptcy filing reflects GM’s steep revenue drop last quarter. It had previously posted $6 billion in losses during the first quarter of 2009 alone. GM showed that its revenue had dropped by nearly half largely because bankruptcy fears scared customers away from its showrooms
GM owes billions in debts. It owes approximately $27 billion to its bondholders.
It also owes billions more to its’ retirees and workers for health care, pensions and other benefits. Many billions more are owed to its suppliers; as well as a couple of billion dollars more to the federal government for its rescue package.
To survive, GM has filed for bankruptcy. In bankruptcy court, GM is forcing bondholders to take only 30 cents for every dollar that they are being owed in proposed equity swaps in bankruptcy court. Thus, obligations owed by GM to these bondholders will now be paid only 30 cents to a dollar and these bondholders will be paid not with cash but with GM stocks. Same also with GM retirees and Unions which are also being forced to also take billions in GM stocks to cover retiree health care, pensions and other benefits due to its workers. The federal government (meaning, us the taxpayers) also will be taking stocks in GM thus owning part of the company instead of being a creditor. Whether or not the federal government, bondholders and unions will be getting something from this arrangement ultimately will depend on whether or not GM will survive and how much it gets from this deal will depend on how much GM stocks rise or fall in the future.
In addition to reducing its debt obligations, GM will be forced to sell some of its assets in order to raise capital; it will be forced to close factories to reduce expenses; and, around 2,600 of its 6,246 dealers will be forced to close to make the remaining dealerships more profitable.
So, how is corporate GM different from individual Juan dela Cruz who may also be suffering from financial distress?
Though GM may counts billions in debts, Juan dela Cruz will probably be counting in the thousands only. While GM may deal with bondholders as creditors, Juan dela Cruz maybe talking about the more familiar credit card debts. Though GM may talk about obligations to thousands of suppliers and thousands of creditors, Mr. Juan dela Cruz maybe talking only of 10 to 20 creditors. In any case, though there is a difference in the scale of the obligation and the number of its creditors, there is no difference at all between GM and Mr. Juan dela Cruz who is in financial trouble. Both of them have obligations that they can no longer pay for.
While GM may talk about plunging revenues and quarterly profits/losses, Juan dela Cruz will talk about being laid-off, or getting reduced hours from hours from work, or getting cuts in overtime hours. In both cases again, there is no difference between GM and the individual Juan dela Cruz. Both are suffering reduced incomes thus contributing to their inability to pay for obligations.
While GM may have Uncle Sam to give them billions in a rescue package, hopefully, Mr. Juan dela Cruz hopefully will have a friend or family who can also lend him some financial assistance in times of need. Again, in both cases Uncle Sam and the family who lends Mr. Juan dela Cruz may or may not get paid depending on how Juan dela Cruz is able to cope with and rise up again from financial ruin.
So, how is the bankruptcy filing of GM any different from the bankruptcy filing of an individual Juan dela Cruz? There is no difference. Though the numbers may be different, the remedies available are the same. The result will be the same. Bankruptcy protection available to GM in a Chapter 11 filing is also available to individuals in a Chapter 7 or 13 filing. Just as GM can force creditors to accept pennies on the dollar, Juan dela Cruz also has the same remedies available to wipe out obligations or to pay off debts with pennies on the dollar too. Just as the bankruptcy filing will hopefully result in a more financially viable GM, a bankruptcy filing by Juan dela Cruz will also wipe out debts and hopefully put him in a position where he too can survive and prosper financially.
(Disclaimer: materials presented above are intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco law offices, a professional corporation with offices in San Francisco, Vallejo and Manila. The law office website is tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at attyrey@tancinco.com)
