Wisconsin residents who follow business news may be interested to learn that Advantage Rent A Car is headed for Chapter 11 bankruptcy. At issue is the value of cars that have been purchased from Hertz as part of Advantage’s sale to Franchise Services of North America and Macquarie Capital. It is this part of the deal that has Advantage struggling with debt.

Hertz Corporation sold Advantage last year as part of a deal that allowed Hertz to buy Dollar Thrifty, which included the purchasing of 24,000 Hertz vehicles. Simply Wheelz, a unit of FSNA that does business as Advantage Rent A Car, was required to take on the residual value risk of the fleet. As part of normal fleet management, Simply Wheelz began selling the Hertz vehicles and suffered losses that averaged approximately $1,633 per car and have added up to a total of $8.6 million in losses.

Given the sizable difference between the book value of the cars and fair market value seen at auctions, FSNA has requested that Hertz provide information that could determine the net book value of the fleet. So far, Hertz hasn’t provided any information, and FSNA states it’s impossible for them to estimate a potential loss.

Chapter 11 bankruptcy is a tool used by business to reorganize its debt. The goal is for the business to complete a plan for the restructuring of debt and emerge in a better financial condition. There are several ways a business can restructure, including financing with favorable terms based on the idea that new lender will receive priority on the newly emerged business’s earnings. The court may also allow the business to cancel or reject contracts. Chapter 11 can also offer an automatic stay that could put most litigation against the business on hold.

Source: Reuters, “Car rental company Advantage to be placed under Chapter 11“, November 05, 2013