By Kyle Olson
Ally Financial Inc’s mortgage unit, named Residential Capital (ResCap for short), filed for bankruptcy on Monday, according to Reuters.
Ally Financial is the former lending organization for General Motors Co and was formerly known as GMAC. The auto-lender’s mortgage unit was once a large profiteer in the subprime lending field before the housing market took a nosedive in 2008.
Since then, the company has been plagued with losses due to the housing market’s slow recovery.
The bankruptcy filing was reportedly favored by some of ResCap’s creditors, according to Reuters.
Although the process will inevitably be a long and drawn out process, Ally Financial’s filing is hope to be a catalyst to paying back $12 billion in bailout money.
During the financial crisis, the US Treasury Department funneled more than $17 billion to the lender and subsequently now owns around 74 percent of the company.
Ally is the fifth-largest mortgage servicer in the United States.
The company also plans to sell some of its international operations to fund the repayment of bailout money. The overseas operations have about $30 billion in assets overall.
During the 2012 election year, the Obama administration is eager to report recoveries from the bailout-era that Obama had led to kick start the economy in a time when many had little faith in the US economy. Ally will be closely observed in this bankruptcy process in order for the company to not become the blemish on the 2012 campaign trail that Obama administration has been trying to avoid.
According to Reuters, ResCap and its advisors believe that this is the first time a financial services company with retail operations not unlike a bank has filed for bankruptcy and has been able to continue operating.
Ally Financial CEO Michael Carpenter stated that he believes ResCap will have paid back two-thirds of the bailout money after the processes have been completed or near-completed. He also stated that he expects ResCap to emerge from bankruptcy within the year, according to Reuters.
Why Bankruptcy? Why Now?
Ally Financial has been reportedly mulling bankruptcy since 2009. The filing in court on Monday signaled that the company is finally ready to start paying back the taxpayers that had lent the company billions of dollars by way of the US Treasury Department.
The bankruptcy option, which has become a popular option for many companies ranging from all different sizes, has been a light at the end of the tunnel for many institutions.
With the filling, ResCap is able to restructure its business and restore its creditor’s investments in the company.
Although bankruptcy is seen by many as an unfortunate situation, it can also be a tool to start anew and prosper in future years as company or as an individual. Whether it’s Chapter 7, Chapter 11 or Chapter 13, you as an individual (or a business in this case) must choose the right path to future financial prowess and in doing so, researching the facts is the most important step you can do.