GMAC, the large consumer lender, as well as the Big Three auto makers are teetering on the brink of bankruptcy. Consumer debtors may be forgiven for taking a certain pleasure in their potential discomfort.
GMAC has been in severe financial distress for some time now. This week, their plan to raise enough capital to meet the reserve requirements to become a bank holding company foundered — with some sources believing this was the last chance GMAC had to avoid bankruptcy. One would have to be living a truly isolated life not to be aware of the travails of the domestic auto industry and government efforts to bail it out.
But flash back to 2004-2005 when aggressive credit industry lobbying ultimately delivered the absurdly-named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Consumer debtors who owed money on automobile loans were a significant target of these changes, forcing them to pay more for cars purchased recently among many other changes to make it harder for consumers.
It hasn’t really caused the auto lenders to make a great deal more money from consumers filing bankruptcy since many debtors will be encouraged to give up their depreciated cars instead of overpay. So used cars on the market would increase, driving down the prices of cars over all. The BAPCPA language is imperfectly written to protect car lender interests in any event. And, ultimately, car lenders although being paid more for some cars may be getting paid slower on those cars because the payment is potentially spread over a longer period of time than might previously have happened, thus increasing the potential for non-payment over time. But the auto lender preferences in the law have certainly set the bar higher for consumer debtors to obtain and enjoy their fresh start.
For the auto industry and GMAC, it may be time to regret pushing BAPCPA besides these things. If required to file themselves, BAPCPA may bite into their fresh start too. Most importantly, Chapter 11 was changed to reduce the chances for these companies to “linger” in bankruptcy. Under BAPCPA, the “exclusivity” period for a debtor-in-possession to propose its plan of reorganization is effectively capped at 22-months, only 1 year and 10 months.
What this means is that these companies will not have the luxury of holding off their creditors for several years in order to re-tool, develop new products, and hope for the economy and car sales to rebound. Unlike many companies that had multi-year periods in which to get their act together and ultimately re-emerge as viable players, the auto industry may be on a very short leash.
Of course the loss of “exclusivity” does not mean their case immediately fails. Rather it only means that other parties-in-interest may propose a reorganization plan that management may not like. The same management that so brilliantly failed to plan for the day when gas prices would be high and easy credit might not be around…and then flew in private jets to Capitol Hill to ask the people’s representatives for billions of taxpayer dollars. Whether the loss of exclusivity would actually be bad for anyone else remains to be seen.
Schadenfreude indeed.
No related posts.
Comments on this entry are closed.