Nortel is attempting to put the brakes on its financial free fall by seeking bankruptcy protection in the United States, Canada and Europe.

Read a letter from Nortel's CEO.
Read a FAQ on what this all means.

Legal filings to protect the company from its creditors were filed Wednesday, one day before it has to pay a $107 million bond payment.

The company says it will take even more drastic measures to turn things around than the $400 million cost-cutting campaign it outlined in November that called for selling its metro Ethernet division, laying off 1,300 employees and shuttering facilities.

But the world economic crisis has changed the playing field so that plan is no longer enough. For example, the company has been unable to find a buyer for the metro Ethernet division. 

Filing for Chapter 11 bankruptcy protection in the United States will allow the company to reorganize and undertake a comprehensive business and financial restructuring, says the company's CEO Mike Zafirovski.

"I firmly believe these are the right steps toward a solution for our company," he says in a public letter addressed to Friends of Nortel (see entire letter). Despite its financial troubles, the company says in a press release that it will continue its day-to-day business as usual.

But filing for bankruptcy protection – which can result in creditors receiving less than they are owed - could influence decisions by suppliers and distributors about how to conduct business with the company. Already, competitors such as Enterasys, Extreme Networks and Juniper are swooping in to woo customers and channel partners away from the beleaguered company.

Enterasys says it is offering Nortel and other competitors' customers a 100% credit on their equipment.

Another possibility is that bankruptcy courts could order the sell-off of others of the company's divisions. These include an enterprise division that includes network infrastructure, VoIP gear and contact center gear, and its core telecom division that sells to carriers.

Some customers are remaining steadfast in support of Nortel, at least for the short term. The International Nortel Networks Users Association (INNUA) issued a statement this week saying it backed Nortel's decision and believes it will result in a stronger enterprise focus.