Meltdown 101: Exiting bankruptcy successfully

A Chapter 11 bankruptcy reorganization used to be considered a success if the company cut wages, lightened its debt load and improved supply contracts before emerging as a standalone enterprise.

But times have changed. Today, it’s all about the struggling company’s assets — what they’re worth, whether they can be spun off, whether a new owner is willing to swoop in and buy them up. That’s what happened with Chrysler LLC, which spent 42 days in Chapter 11 — a nanosecond in the bankruptcy world — before it sold the bulk of its business to Italian automaker Fiat Group SpA.

There are a number of ways a Chapter 11 can play out, but the companies at the middle of bankruptcy filings usually have that same basic best-case scenario — a successful sell-off of company assets.

Here are some questions and answers about emerging from bankruptcy.

Q: How long does a typical Chapter 11 take?

A: Most bankruptcy experts say that a large Chapter 11 should be done within 18 months, and that any case that takes longer has less and less chance to produce a standalone business. This assumes that, as a company spends time in bankruptcy, the value of its business erodes.

Q: So what constitutes a successful exit from bankruptcy?

A: It’s all a matter of perspective, according to Loeb & Loeb bankruptcy partner Walter Curchack. For employees, it means keeping their jobs. For suppliers, it means that the business is still alive. For someone buying up assets, it means a cheap sale of pieces of the troubled company.

In the past decade, the idea of what makes a successful Chapter 11 has evolved, according to Seton Hall law professor Stephen Lubben. Lubben said many lenders have taken Chapter 11 filers through a quick asset sale instead of a slower, more arduous reorganization of the core business.

“Chrysler strikes me as kind of being an example of what has been happening — the move away from a traditional plan,” Lubben said. The airlines, most of which have gone through Chapter 11 at least once, were examples of the older style of reorganization — they renegotiated labor contracts, cut wages and costs, and then came out of court protection intact.

“Chrysler is more like what they tried to do in Circuit City, which didn’t happen,” Lubben said. Circuit City wanted to sell off assets, but wasn’t able to pull it off — so it was forced to liquidate and go out of business.

Q: So, Chrysler’s ability to find a buyer for much of the company helped it zip through bankruptcy quickly?

A: Yes and no. Curchack said to keep in mind that Chrysler’s so-called quick exit from bankruptcy is somewhat misleading. In reality, a part of the company is still in bankruptcy.

“What happened is that a portion of Chrysler, the more valuable assets, were sold to Fiat in exchange for money, which went to pay off certain creditors,” he said. “Chrysler itself — Old Chrysler, if you will — is still there and will go on for years,” continuing to sell off assets and distributing the proceeds to its remaining creditors.

Q: Is there really even such a thing as a bankruptcy success? Doesn’t a Chapter 11 filing automatically mean a company has suffered a serious failure?

A: The notion of a successful emergence from bankruptcy is a “misnomer,” St. John’s University law school professor Anthony Sabino said, noting that “people always get hurt” in the process — employees lose their jobs, shareholders are usually wiped out and the banks are getting less return on loans and lines of credit.

“These days, what passes for successful is when there is some salvation of some of the better assets — the crown jewels and so forth — and there is a fresh start with some strategic partner.”

Q: What challenges do companies face once they’ve put bankruptcy behind them?

A: Such a company faces all the same challenges of a normal business, and then some, Sabino said.

“A company that just emerged from Chapter 11 is on a razor’s edge,” he said. “It is arguably better than when it went in. The question is: Are they sufficiently positioned?”

He said that given the current economy, companies are wary of exiting into such conditions.

“There is great risk of a Chapter 22,” he said — bankruptcy jargon for a company that has filed for Chapter 11 twice.

“Any number of things can blow you out of the water,” he said. “A company that has been doing reasonably well and has been solvent, had cash reserves — the bottom line is they are better prepared for the storm. A company coming out of Chapter 11 — there’s no reserve left. There’s nothing in the bank.”

AP Auto Writer Bree Fowler contributed to this report.