CIT Group Inc., the 101-year-old commercial lender that saw its funding dry up in the credit crunch, filed for bankruptcy in an effort to cut $10 billion in debt following a failed debt exchange and U.S. taxpayer bailout.

CIT listed $71 billion in assets and $64.9 billion in liabilities in a Chapter 11 petition yesterday in U.S. Bankruptcy Court in Manhattan. The Treasury Department said the government probably won’t recover much, if any, of the $2.3 billion in taxpayer money that went to CIT.

The lender, which funds about 1 million businesses such as Dunkin’ Brands Inc. and Eddie Bauer Holdings Inc., plans to exit court protection next month after bondholders voted in favor of a “prepackaged” plan. None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, and operations will proceed as normal, CIT said in a statement.

“Short term, it’s going to cause some difficulties for startups and smaller borrowers,” said Jean Everett, a partner at Hiscock & Barclay LLP focusing on financial institutions and lending. “CIT lent across so many sectors, it’s sort of difficult to predict how it’ll affect each sector.”

The bankruptcy, the fifth-largest by assets, “will allow CIT to continue to provide funding to our small business and middle-market customers,” Chief Executive Officer Jeffrey Peek said yesterday in a statement.

Source: Bloomberg

CIT Group bankruptcy filing could push at least some small businesses it finances to look for a new lender, but finding new credit will be tough.

CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved its reorganization plan.  

The bankruptcy was long expected and followed a struggle to deal with its debt burden amid the credit crunch and recession, and paves the way for it to restructure its liabilities.

However, the bankruptcy case was reassigned on Monday to U.S. Bankruptcy Judge Allan Gropper following the recusal of Judge Robert Gerber, who had been assigned the case hours earlier.

A courtroom deputy for Gropper said Gerber recused himself from the case. The deputy did not give a reason for the recusal. Gerber's chambers had no immediate comment.

Under the plan announced on Sunday, CIT expects to reduce total debt by about $10 billion. The company's operating units are not in bankruptcy, and plan to continue lending.

But the company's long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, even if CIT's doors are still open, lawyers said.

Clients for CIT's factoring business are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest company in the sector, where lenders buy unpaid customer bills from companies.

Source: CNBC