Ally's Residential Capital Files for Chapter 11 Bankruptcy Protection

Residential Capital, the unprofitable home mortgage portion of Ally Financial

, filed for bankruptcy protection. The Chapter 11 bankruptcy filing will separate Residential Capital from Ally's auto loan business, allowing the company to focus on that and its financial businesses. The action “will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us (and) to focus 100 percent of its energies on further strengthening its already leading U.S. auto finance and direct banking franchises," Chief Executive Officer Michael Carpenter said in a press release issued today. Chapter 11 protection will allow Residential Capital to continue operating with the goal of exiting court protection. Ally received a $17.2 billion bailout from the U.S. Treasury, which was 74% of the bank. The company has repaid about $5.5 billion, or one third of the investment. The government does not own any of Residential Capital, which has reached agreements with creditors to speed the bankruptcy filing. Ally plans to be able to return at least another third of the original investment by the end of the year and pay back all of the money loaned during the economic crisis as part of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. Residential Capital has struggled to make debt payments since 2007. Last month the lender missed a $20 million, semi-annual interest payment on about $473 million in 6.5 percent notes due in 2013, Detroit-based Ally said in a regulatory filing. The firm had 30 days before a default occurs, according to the filing. A group of bondholders represented by White & Case have reached a preliminary agreement with Residential Capital. Ally will provide $150 million in bankruptcy financing and pay $750 million to Residential Capital, the company said in the statement. Residential Capital will have $1 billion to $1.2 billion in government-insured loans as part of the reorganization. Ally will also look to sell its international operations, including auto finance, insurance, and banking and deposit operations in Canada, Mexico, Europe, the U.K. and South America, it said in today's statement.