In the largest bankruptcy ever to hit the U.S. Auto sector, Delphi, an auto parts manufacturer, declared bankruptcy in Oct 2005, just before the change to the new bankruptcy law. Delphi had been spun off as a new company by GM only six years before. They were afraid that they would have had to cut the bonuses to the new bankruptcy mangers, if they waited after October.

Does this bankruptcy have any lessons for the small business owner? Unless you can get debtor-in-possession financing like Delphi did, from major banks like Morgan-Chase bank, probably not. On the other hand, it’s interesting to know that bankruptcy reorganization does not have to be the end for a company; it can be a new beginning.

Certainly, odd things go on during large bankruptcy cases. This has been the situation for the last several years as we watch the bankruptcy of steel giants, airlines and now auto. The bankruptcies lead to drastic cuts in wages, benefits and pensions, but also the plan is to literally shutdown Delphi’s manufacturing operations in the USA, and globalize it “by bankruptcy”, with manufacturing capability moved overseas to low wage countries.

Other problems hitting the US economy related to these bankruptcies, is the high cost of health care, and the lack of national health care programs, which makes it a large expense for companies. Of course, health care expenses are tax deductible, but they can be a drain in the USA, as opposed to other countries in Europe, or Japan.

These bankruptcies are leading to rapidly rising bills at the PBGC, the Pensions Benefits Guarantee Corporation.

This is because more and more large companies through bankruptcy, got rid of their pension obligations, hand gave them over to the PBGC, which is now covering over 35 million American workers. The workers for United Airlines and so on are only getting paid half of their pension through the PBGC, and the government corporation itself is in danger of eventually running out of funds.

The 1978 Bankruptcy Reform Act contributed to the special rights huge companies have when filing for bankruptcy. Instead of putting these companies under a bankruptcy trustee, to see how to get the company back into shape, they are run by the debtor-in-possession. The debtor-in-possession, the previous management, gets large loans from major banks to keep running, and in turn have as their major priority re-paying these banks, who then run the restructuring operation. This happened to airlines, steel companies, etc. See Prof Mark Reutter, http://makingsteel.com. and http://www.legalformsguide.com forlegal information for small businesses.

In a normal Chapter 11 case for a small business, bankruptcy gives a company time to reorganize itself, or be reorganized by a trustee, or even by its creditors. The company going into bankruptcy must give the court a list of its assets and debts, and the existing management runs the company as, “debtor in possession”.

The U.S. Trustee plays a role in monitoring the bankrupt company during reorganization, and the trustee supervises a meeting of the corporation’s creditors.

However, especially in the cases of large bankruptcies in the news, the DIP is effectively taken over by the creditors who lend to the company while in bankruptcy. That’s how Delphi, United Airlines, etc, end up the way they do.

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Howard Giske is a legal consultant at http://www.incparadise.com for Incorporation services. Also, for legal information for small businesses see http://legalformsguide.com.