Ally Financial's mortgage arm ResCap files for Chapter 11 bankruptcy

Ally Financial's mortgage arm ResCap has filed for Chapter 11 bankruptcy. (Ally / May 14, 2012)

Ally Financial Inc., which is still trying to pay off its bailout loan from the U.S. government, said its struggling Residential Capital mortgage subsidiary filed for Chapter 11 bankruptcy early Monday.

The filing will help Ally distance itself from litigation-laden ResCap and focus instead on its profitable auto loans and direct banking ventures, the company said. Ally also said that it would look into selling its international operations.

"The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us," said Ally Chief Executive Michael A. Carpenter in a statement.

Ally has paid back $5.5 billion to the U.S. Treasury since being rescued as part of the auto bailout, back when it was still known as General Motors Acceptance Corp., or GMAC. But the company still owes nearly $12 billion -- or two-thirds of the total loan.

Without bankruptcy, ResCap and its toxic mortgages would have sucked billions of dollars from its parent, further hampering Ally’s ability to repay the government, the company said Monday. Ally now plans to return at least another third of its debt by the end of the year.

Ally will be putting up $150 million to help finance the bankruptcy and will also contribute $750 million in cash once the restructuring plan is approved, which ResCap hopes will happen by the fourth quarter.

Ally, which is 74% owned by the government, also said it will also make a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages.

ResCap, which will continue operating through its Chapter 11 proceedings, said it will sell its mortgage origination and servicing businesses to Nationstar Mortgage.

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