Meltdown 101: If a carmaker files for bankruptcy

[December 05, 2008]  MONTGOMERY, Ala. (AP) -- As much as they hate the idea, one or more of the big U.S. automakers might end up filing for bankruptcy as they struggle with growing debt, plummeting sales and a tough sell on a $34 billion rescue package they want Congress to pass.

Leaders of Ford Motor Co., General Motors Corp. and Chrysler LLC have said they don't consider bankruptcy a viable option, since it would destroy potential customers' confidence in the companies. But they also say they're burning through millions of dollars every day, and they need help from the federal government.

If one of the Detroit Big Three does file for bankruptcy, the impact could trickle down in several ways to the people who buy their cars. Joe the Chevy driver may not get as much money if he sells his car. His auto dealer might shut down. And replacement parts could become harder to find.

Here are some questions and answers about the potential impact of an automaker bankruptcy on car owners.

Q: First of all, what sort of bankruptcy filing would these companies make?

A: It likely would be what's called a prepackaged Chapter 11 filing. That allows the company to continue doing business while renegotiating contracts and terms to gain some financial breathing room from its debt.

The prepackaged part means the company has already negotiated some of the terms before it files anything in court. Corporate bankruptcy attorney Alan Mills says he doesn't think any of these companies are considering a Chapter 7 filing, which would essentially put them out of business.

Q: If they're going to renegotiate everything, what does that mean for the warranty on my new car?

A: Probably nothing. These carmakers already may see a drop in business simply because they filed for bankruptcy. They can't afford to alienate any existing customers by messing with their warranties.

One of the first goals for companies in a bankruptcy proceeding would be making sure they have the authority to honor warranties, Mills said. Even carmakers that stop producing a certain model will still honor the warranty on that model.

Q: But what about that sweet, zero-percent financing deal I landed on my new car, or the rebate I've been promised?

A: See above. Honoring those agreements will become a priority for the carmaker.

"Your terms are going to be your terms unless they want to lose customer base," Mills said.

Q: How would a bankruptcy filing affect the value of my car if I want to sell it or trade in for something else?

A: Here's where Joe the Chevy Driver may get pinched. People may avoid the brands of a bankrupt carmaker because they will worry about warranties or the availability of parts and service down the road.

This could be a problem especially for cars that are only a couple of years old and still have some warranty coverage, said Paul Taylor, chief economist for the National Automobile Dealers Association. Cars that are five to 10 years old pose less of a risk for the buyer because they have less money at stake.

Q: Will I be able to get parts for my car if the manufacturer files for bankruptcy?

A: Business likely will go on as usual during a restructuring. But in some cases, a carmaker and parts supplier may not be able to agree on new terms or a renegotiated contract. That could lead to some disruption in parts supplies.

Q: Does that mean my repair bill could rise?

A: In some cases, yes. It may take longer to make repairs, and it may cost more because the mechanic might have to search for another parts supplier.

Q: Will I still be able to find parts several years down the road?

A: Carmakers are expected to keep an adequate supply of service parts available through the expected life of a car. Those are parts made specifically for a given make and model. That could change with a bankruptcy, and some parts may become harder to find, said Ron Pyle, president of the Automotive Service Association.

However, there will always be after-market parts. But these aren't made under a contract with the carmaker, and they could be designed to fit more than one car. That means they may not fit or function perfectly for your car.

Q: How would my car dealer fare through a bankruptcy?

A: The dealers, whose sales have already slumped in a down economy, could see even more pain if potential customers are scared off by an automaker's bankruptcy filing.

Bankruptcy may also allow carmakers to cancel franchise agreements that are normally protected by state laws. That may make it easier for them to reduce the number of dealers selling their brands.

Q: What about recalls?

A: The National Highway Traffic Safety Administration has said a bankruptcy filing wouldn't discontinue a carmaker's obligation to recall anything that's defective, and the government agency would go to bankruptcy court to argue that point.

[Associated Press; By TOM MURPHY]

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