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Business bankruptcy may affect GM's current troubles

One of the advantages of bankruptcy, whether for a New York business or an individual consumer, is that it generally wipes clean the financial slate for that entity. While it may deplete the entity's resources through debt repayment and asset liquidation, it also usually leaves the entity without creditors hounding it for money. The timing of a bankruptcy filing can affect which claims and debts against the entity are subject to the terms of the bankruptcy court's final order.

The American automobile manufacturer, General Motors, has recently been hit with a slew of lawsuits related to what consumers allege to be faulty ignition switches in some of GM's models. Consumers have claimed that their cars are worth less because of the problems, and that GM should compensate them for their losses. GM has asked the bankruptcy court that heard its bankruptcy matter several years ago to make an important determination.

That determination involves whether the problems alleged by consumers arose before or after GM reorganized in business bankruptcy. The company claims that it was one entity pre-bankruptcy and another post-bankruptcy. Therefore, if the claims arose before the bankruptcy, the new GM would not be liable for the consumers' complaints.

Business reorganization can allow a company to emerge from a bad financial situation as a new and liability-free entity. Though the new entity can incur its own problems from actions that arise after its bankruptcy proceedings terminate, it generally cannot be held responsible for what happened before it was created. This is what GM is asking the bankruptcy court to determine as it faces ignition switch-related consumer complaints.

While consumers oppose GM's assertion, it will be up to the court to determine how the cases should proceed. Bankruptcy matters are not without challenges as demonstrated by this story. However, bankruptcy can be an important step for both businesses and consumers who desire to start over on solid financial footing.

Source: FOX Business, "GM faulty-switch cases sent to New York court," June 9, 2014

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