History shows corporations can survive bankruptcy

ByABC News
May 29, 2009, 7:36 PM

WASHINGTON -- Can General Motors file for bankruptcy and re-emerge from Chapter 11 as a profitable and viable automaker?

Other major American companies such as Texaco, Dow Corning, Delta Airlines and United Airlines have filed for Chapter 11 reorganization and successfully exited.

GM enters the process, according to bankruptcy experts, with the most important element needed for an eventual exit an outside source of financing going forward.

In GM's case, that source is named Uncle Sam.

"What is distinctive about this situation is that the government is behind GM," said Randal Picker, a professor of commercial law at the University of Chicago Law School. "The government is ready to step up and do that."

GM was hesitant to file for bankruptcy fearing no one would buy its cars, but that appears to have been overcome with the government agreeing to back its warranties, according to Picker.

"I think we have gotten over the mental hurdle," he said. "They have got a have a business plan for selling cars profitably."

Bankruptcy court gives a company the opportunity to reduce costs by disposing of leases, contracts, employee benefits and, in some cases, court judgments or class action lawsuits.

GM plans to cancel about 1,100 dealership agreements, sell its European operations, close more U.S. factories, and implement a new labor agreement with the United Auto Workers as part of the business plan for the new streamlined GM.

GM Vice Chairman Bob Lutz recently characterized the plan as a "radical restructuring."

Airlines such as United and Delta, which were facing competition from low-cost carriers such as Southwest, used bankruptcy reorganization to lower both their operating costs and debt. Pilots and other employees agreed to wage cuts.

GM and Chrysler are in a similar position, trying to get their costs in line with competitors such as Toyota, noted David Skeel, a professor of corporate law at the University of Pennsylvania Law School.

According to the Administrative Office of the U.S. Courts, there were 10,160 Chapter 11 reorganization filings in 2008.