Yes, we’re hearing the “B” word around Detroit these days. It’s scary, and that’s no joking reference to Halloween. Both Chrysler and GM claim that bankruptcy isn’t in the cards, and these denials are the most frightening thing about the whole situation, because we all know what often comes after a denial….
Or do we? I called up Bob Sanker, a Cincinnati-based bankruptcy specialist at the firm of Keating, Muething & Klekamp, to find out just what the implications of bankruptcy would be, both for the Detroit 3 and for their suppliers.
Here’s the caveat: What follows is not legal advice. Furthermore, it represents what I understood, not Mr. Sanker’s exact words. So – and this is important – if there are any inaccuracies here, it’s my personal fault.
Having gotten that out of the way, here’s the bad news. If GM or Chrysler declare bankruptcy they will file under Chapter 11, the so-called “reorganization:” chapter. Under Chapter 11, if they owe you money, they don’t have to pay you, and at least in the short term, they won’t. Also, if you have a contract with them, they don’t have to honor it.
There are a couple of wrinkles. Under some conditions, even after declaring, they can choose to pay you (ahead of other creditors) if you qualify as being “critical to the reorganization,” e.g. if you’re a sole supplier of a part they can’t do without and still stay in business. And they can choose to honor a contract as-is. But it’s all at their discretion.
If you’re just doing business on a P.O./invoice basis, you can just stop shipping to them.
There’s another, more difficult question on this subject. What if you have to think about bankruptcy? Mr. Sanker’s advice is succinct: Get help right now! In his experience, companies that see trouble coming early can often restructure under bankruptcy protection (Chapter 11) and survive as a smaller, pared-down company. But “if the hole is too deep,” there are no options but liquidation (Chapter 7).
If you’re part of the GM or Chrysler supply chain, it’s time to crank up Excel and look at worst-case scenarios.