Obama exploring “Prepackaged Bankruptcy” for Detroit Three

U.S. President-Elect Barack Obama is said to be considering a ‘prepackaged bankruptcy’ plan for the Detroit Three automakers. Prepackaged bankruptcy is a strategy whereby a detailed plan for restructuring and creditor settlements are established before a Chapter 11 bankruptcy filing is initiated. Settlements with creditors and renegotiation of contracts takes place out of court, ahead of the actual proceedings.

A prepackaged bankruptcy can be completed quickly, and avoids the potential chaos and uncertainty of a Chapter 11 filing. It’s sometimes viewed as a ‘best of both worlds’ solution, because it provides the benefits of bankruptcy with a predetermined plan for the company’s survival. The strategy would enable GM to eliminate the union obligations that make it uncompetitive, say proponents.

“It creates the environment to deal with GM’s problems but limits government financial commitment,” bankruptcy lawyer Mark Bane of Ropes & Gray in New York told Bloomberg.

James Harris, President of Seneca Financial Group in New York, said a ‘prepack’ deal combined with a small amount of financial aid from the government — rather than $25 billion — is the most logical path.

“I look at the Democrats that say these businesses are very important to the economy, and I agree with that, so the logical step is a prepack,” Harris told the financial publication.

Obama’s eloquent way with words might also enable him to explain such a strategy to the American people, thereby preventing a massive drop in sales.

Ford and General Motors have repeatedly said traditional bankruptcy is not an option, because consumer surveys show people would not buy a car from a bankrupt company. But a prepackaged bankruptcy facilitated by the U.S. government could allow GM to continue operating and instill a sense of confidence in investors and consumers.