Why Bankruptcy is the Best Solution for American Auto Companies--Becker

Posner gives an excellent and skeptical discussion of the negotiations over terms of the auto bailout. I am in full agreement with him except on one crucial point: I believe, as I stated in my November 18 discussion, that the big three auto companies should be allowed to go bankrupt. This sharp recession is actually a good rather than bad time for them to go bankrupt. The global auto industry is in a deep depression, and GM, Ford, and Chrysler have been among the hardest hit. GM said that it expects to produce about 30 percent, or 250,000, fewer cars in the first quarter of 2009 than it did in the comparable quarter of 2008. It is temporarily closing about 20 North American factories in order to make these production cuts. Since they cannot sell their cars anyway because of the depression in car demand, especially for their cars, any disruptive effects bankruptcy would have on their production actually helps them adjust their production of cars to the reduced demand for these cars. GM and the other carmakers have claimed that bankruptcy would have a particularly big effect on sales because consumers would fear that their warranties on the cars they bought could not be honored in the future. Whether this is true or not would depend on whether consumers expect these companies to emerge from bankruptcy in the future as stronger rather than weaker companies compared to a bailout. If they expect bankruptcy to lead to better labor conditions for the company and smaller debts, bankruptcy would give consumers more rather than less confidence that their warranties would be honored in the future. Furthermore, car prices would only have to fall a little to offset any fears about future warranty protection since car buyers are not willing to pay a lot for warranties. But suppose for this and possibly other reasons, customers did reduce their demand for cars of the bankrupt American car producers. What would that mean? Presumably, they would not stop buying cars, but they would instead shift their demand toward the closest substitutes; namely, American-made cars of Toyota, Honda, Nissan, and other foreign carmakers. Their share of American made cars is over one third and rising, so bankruptcy of the big 3 might speed up this growth in their share. What that mainly means is increased employment of autoworkers in Tennessee and other states where foreign producers congregate relative to employment of autoworkers in Michigan, Ohio, and other Midwestern states where the factories of the American car producers are mainly located. I understand the political pressures that the bailout is responding to. The UAW was an important supporter of Obama and Congressional Democrats, whereas the workers in foreign-owned plants are mainly nonunion, and tended to vote more for Republican candidates. Still, one should not confuse the politics of the situation with what is the better economic outcome for consumers, and what is the effect of bankruptcy of the big three automakers on overall American employment and unemployment. My earlier discussion argued that in fact bankruptcy would strengthen rather than weaken the competitive position of the American automakers, especially when combined with government debtor-in-possessor financing. The bankruptcy proceedings would likely break the union contracts and reduce their pay to levels comparable to those received by American employees of foreign car manufacturers. They would also break the contracts for health payments and pension obligations, which have been significant factors in causing their financial distress. Bankruptcy would also help the companies restructure their debt so that interest payments are much lower. I do not know whether even after all this, the big three can compete effectively in the long-run market for cars--almost surely Chrysler cannot--but bankruptcy combined with management changes, especially at GM, would give them their best chance. This is certainly true compared to the alternative proposed by the Democrats, which includes the preposterous idea to create an auto "czar" who would oversee the industry. Since when does the American approach to market structure include czars and congressional management of an industry? Such an approach is just an encouragement to the development of a chronically sick patient (American auto producers) who never gets better, and continues to rely on taxpayer support. It is true that the bankruptcy judge has great powers as well to guide the restructuring of bankrupt companies. However, companies either eventually close down as a result of entering bankruptcy, or emerge as generally more viable companies--as happened with United Airlines and other companies in the airline industry. This is an additional reason why bankruptcy is a much better alternative to a bailout that will cost far more than $25 billion, and could continue for a long time. I am disappointed that President Bush seems willing to use several billion dollars of the $700 billion financial rescue package to aid the auto companies after Congress could not agree on a bailout. Whatever President-elect Obama will do after taking office, the right policy for the president is to follow Congress' lead and allow American car manufacturers to restructure through bankruptcy.

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[Fitzgerald Q. McAuliffe]

I would like to thank you for the efforts you have made in writing this post. I am hoping the same best work from you in the future as well. Great information put together well. Persons in serious financial difficulty may be at the point that bankruptcy is the only answer. If a person has lost a major portion of their income or owes debts that cannot be paid, then this may be the best financial solution. There are some serious consequences to be considered before filing, so make sure that you speak with a professional before proceeding.

The codes dealing with bankruptcy has several chapters and often the type of filing a debtor makes is referred to by chapter. Some chapters are very specific as to who may use them.One of the advantages of filing a Chapter 7 is that there is a temporary hold placed on your properties so that debtors cannot reposes them. In fact, creditors must start filing all claims with the court and must stop calling or contacting debtors when notified of the action. Assets that are owned above the exempted amounts will be sold and the proceeds will be divided among debtors. Once the case is discharged, usually in 3-6 months, the bills are paid in full. During the time, persons that file can keep their income. Once the discharge is in effect, the person can start to effectively rebuild credit once again. Persons with limited assets may lose only their bills.

Chapter 11 includes debt reorganization. This is one of the most complicated of the chapters on the subject and most persons filing for Chapter 11 will need the help of an attorney to work through this complex code.

Chapter 13 filing requires that debtors be able to set up and maintain a payment plan to their creditors. The payment plan should include all disposable income for the individual or couple for the next three to five years. This chapter can stop debt collectors attempts and phone calls. It takes a longer time than a Chapter 7, but allows the petitioner to keep all his or her assets.

No matter which chapter you choose, some debts will not be stopped. Student loans as well as other debts owed the government are nearly always excluded. Judgments from cases where the petitioner injured or caused the death of another person while under the influence cannot be discharged by the proceedings.

With simple cases and limited income or assets, filers may be able to complete their own paperwork using blank forms or a computer program that completes the forms for the debtors. Persons needing help with the filing may want to contact the attorney for assistance. Often professionals who know the law can help to save more of the assets.

[lower back pain]

As for the Detroit Automakers problem, this is primarily due to pension and benefit packages that have built up over the years. Would they be in this problem now if the Nation had passed a National Health Program ten to twenty years ago like the rest of the Industrialized world? Probably not.

[back pain relief]

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[skincare]

Without a bankruptcy there will never be such a discharge; at minimum there's just not the political will to achieve it, even if there were a concensus on it's necessity.

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