Sources: Chrysler to file for bankruptcy

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(Agencies)
Updated: 2009-05-01 00:12

WASHINGTON – Chrysler will file for bankruptcy after talks with a small group of creditors crumbled just a day before a government deadline for the automaker to come up with a restructuring plan, two administration officials said Thursday.

Sources: Chrysler to file for bankruptcy

Clouds are reflected on a Chrysler PT Cruiser at a Chrysler dealership in Rome April 30, 2009. [Agencies]

The Obama administration had long hoped to stave off bankruptcy for Chrysler LLC, but it became clear that a holdout group wouldn't budge on proposals to reduce Chrysler's US$6.9 billion in secured debt, according to the officials, who spoke on condition of anonymity because the filing plans are not public. Clearing those debts was a needed step for Chrysler restructure by the Thursday night deadline.

Bankruptcy doesn't mean the nation's third largest automaker will shut down. And the privately-held Chrysler is expected to sign a partnership agreement with the Italian company Fiat as early as Thursday as part of its restructuring plan. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company's creditors would get.

President Barack Obama is expected to discuss the nation's auto sector at noon Eastern.

The Treasury Department's auto task force has been racing in the past week to clear the major hurdles that prevented Chrysler from coming up with a viable plan to survive the economic crisis ravaging nation's automakers.

Along with the Fiat deal, the United Auto Workers ratified a cost-cutting pact Wednesday night. Treasury reached a deal earlier this week with four banks that hold the majority of Chrsyler's debt in return for US$2 billion in cash.

But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and were holding out for a better deal.

"While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success," said one of the administration officials.

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