Well, I'm no expert either, but I think you have it right. The debt is "reapportioned" to suppliers/investors, not "wiped out".
I think one of the things a BK does, is provide a structured and more "fair" way of reapportioning that debt. I'm pretty sure that the BK judge might say something like all parts suppliers who are owed money for past deliveries will receive 60 cents on the dollar or whatever. Now, w/o a BK judge, the big companies with lawyers and connections might get 90 cents, while the little guy gets nothing.
At least as I understand it, if more knowledgeable people know differently, please fill us in. TIA.
-ERD50
You have correctly outlined one of the key premises underlying bankruptcy law -- "The squeaky wheel gets the grease." Ideally, bankruptcy prevents disgruntled creditors from putting the screws to a troubled company in a rush to get paid before everyone else, on the theory that such a rush will drive a company completely out of business when it otherwise could be rehabilitated for the benefit of all creditors. The Bankruptcy Code tries to accomplish this by promoting equal treatment for creditors of equal rank (i.e. - share the pain). Like anything else in life, ideals run ahead of actuality.
Recall that there are both financial creditors of GM (the bondholders) and trade creditors (suppliers). We are discussing here the trade creditors/suppliers. The bankruptcy code, in greatly simplified form, provides a distribution of assets of the bankruptcy estate in the following order: 1) secured creditors to the extent of their security (with exceptions for carve outs, Section 506 claims and other stuff not immediately germane) 2) costs of administration of the estate (i.e the bankruptcy lawyers); 3) unsecured creditors; 4) equity holders - preferred first, then common.
Remember the "equal treatment" ideal? It is just that - an ideal. The real world is much messier. First, suppliers may have reclamation rights. Generally, that means that when there is identifiable product that has not yet been incorporated in a higher level product (i.e. - a pile of windshield wiper motors not yet attached to a car), the supplier may "reclaim" them if not paid. The supplier's reclamation rights are limited to parts supplied within a certain number of days of the bankruptcy filing (20, if I recall correctly). Suppliers don't really physically reclaim the parts. Rather, this simply means that they get paid 100% of what they are owed for that 20 day period. For more complicated machinery, it is possible that the supplier has a purchase money security interest if GM/Chrysler was to pay the purchase price over time. In that case, the supplier is a secured creditor, at the top of the heap. Keep in mind, as well, that machinery can be leased. If the bankrupt company wants to continue to use the leased machinery, it must pay cure any lease defaults and pay the lease payments going forward . Again, a 100% payment.
But what, you ask, happens to the ordinary supplier of widgets, who has no reclamation claim, no purchase money security interest and no lease? Again, it turns out that some creditors are more equal than others. Certain creditors may be designated as "critical vendors". In order to keep them supplying parts that are absolutely essential for continued operation (e.g. -- the sole source supplier of drive shafts), the debtor (GM/Chrysler) will ask the court to allow it to pay these vendors 100% on their pre-bankruptcy claims. The case law in this area changes regularly, and I am uncertain what the current state of the law is in the Southern District of New York (where these companies filed).
In general, it might be said that a big Chapter 11 bankruptcy does 2 things. With the important exceptions noted above, it shares the pain among the creditors. To the extent there is insufficient cash/assets to pay creditors, Chapter 11 coverts the old debt holders/creditors to new equity holders. It really is the only fair way to do these things.
