The Good, the Bad and the Ugly: Auto Bailout Alternatives

Bankruptcy: A Road to Recovery?

While Fitzgerald believes that consequences of an automaker bankruptcy are "unimaginable," he said that Ford could actually benefit if GM or Chrysler went out of business. With one or two rivals out of the way, he said, the automaker would grab a greater market share.

Meanwhile, scholars like Altman and Richard D'Aveni, a professor of strategic management at the Tuck School of Business at Dartmouth College, say they believe bankruptcy is a better alternative to a government bailout.

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"We are going to take the hit to the economy with the failure of the Big Three car companies sooner or later," D'Aveni said. "It's much better to do it now when there's something left to work with in the companies."

D'Aveni said that filing for bankruptcy -- specifically, restructuring under Chapter 11 bankruptcy protection -- would allow automakers the flexibility to dramatically renegotiate their labor contracts, eliminate redundant product offerings and improve the way they sell cars overall.

If GM and Ford were to file for bankruptcy, they would eventually emerge "smaller but stronger."

D'Aveni was less optimistic about Chrysler, which he called "the weaker sister" in the U.S. auto industry. Chrysler's size and its products, he said, make it less competitive in the world auto market than Ford and GM.

Altman said that for a successful Chapter 11 restructuring the companies would have to find what's known as "debtor-in-possession" or DIP financing that would fund the companies' restructuring efforts and also backstop consumers' warrantees.

Altman projected that such financing would amount to $40 billion to $50 billion in loans. Because of the massive amount of money involved, he said, the only lender to provide such funding would have be the federal government.