President-elect Barack Obama signaled last week that even if Congress does not bailout Detroit’s Big Three this month, he will push for federal help once he is sworn in. But it appears that at least some Democrats on Capitol Hill are warming to the idea of a much needed bankruptcy for the automakers. The Washington Post reports:

“Everything is on the table” in a prearranged bankruptcy deal, said a Senate Democratic aide who spoke on condition of anonymity because he was not authorized to speak on behalf of his boss. “That’s one of the big attractions. It provides flexibility that otherwise couldn’t be there.”

Heritage Senior Legal Policy Analyst Andrew Grossman outlines some of those “flexibility” attractions:

The benefits of reorganization would begin immediately with the automatic stay obtained at the moment of filing. Once a company has filed for bankruptcy, it may suspend payment of all debts, giving it breathing room to take stock of its assets and situation.
The filing company [also gains] the flexibility to reconsider its own contractual obligations, and this may be the major benefit of reorganization for automakers. As described above, many of the Big Three’s legacy problems are manifest in contractual relations governed by unfavorable legal regimes. Among them are excessive and overbearing dealer networks that are nearly impossible to reform because of state franchise laws and unrealistic labor agreements struck under federal labor law. In bank­ruptcy, however, everything is on the table.

Recognizing the great importance of labor rela­tions, the Bankruptcy Code addresses it specifically. Unlike with other contracts, a business undergoing reorganization cannot simply reject a collective bar­gaining agreement. Instead, it must propose to the union modifications to the agreement that are nec­essary for it to achieve a successful reorganization and that “assure[] that all creditors, the [business] and all of the affected parties are treated fairly and equitably.”[6] In addition, the business must provide the union with relevant financial information so that it is able to evaluate the modified agreement.