The letters GM sent to the bottom 18% (1100) of its dealers on Friday telling them it will not renew their contracts in October 2010 is a sign that General Motors may end up filing for Chapter 11 bankruptcy. The reason it signals bankruptcy is that if the company files for bankruptcy all of its contracts, including dealer franchise agreements, can be rejected or renegotiated.

Other signs that hint towards a bankruptcy filing include: (1) six top executives recently selling GM shares even though they are worth only about $1. If in bankruptcy, they would be worth nothing. (2) GM has indicated that it plans to pay suppliers earlier than expected or prior to a bankruptcy filing freezing those accounts. This is most likely an attempt to keep the supplier network functioning so that parts are available and GM can operate during Chapter 11. (3) GM is looking to unload brands in an attempt to streamline its operations. GM is seeking bids for Saab, Hummer, Saturn, and Opel.

GM is racing to meet the June 1, 2009 government deadline. The company must convince bond holders to forgive much of what is owed, negotiate new labor contracts and trim its dealer network. If the car company can not achieve these goals, the government can refuse to loan more money, which would force a bankruptcy filing. GM has already borrowed $15.4 billion.

Jeffrey Herrick