April 30 (Bloomberg) -- Chrysler LLC will proceed today with a Chapter 11 bankruptcy filing to reorganize into a more viable carmaker in a partnership with Italy’s Fiat Spa, an Obama administration official said.

The official, who spoke on condition of anonymity, said that the failure of some small creditors to agree to a final settlement is prompting the bankruptcy option. President Barack Obama will speak at noon New York time on the auto industry, the White House said in a statement today.

The president’s staff plans to use the filing to pave the way for Fiat to take a 20 percent stake in the Auburn Hills, Michigan-based automaker, people familiar with the situation said. If Chrysler has to go through bankruptcy, it won’t take long, Obama said yesterday.

“It would be a very quick type of bankruptcy, and they could continue operating and emerge on the other side in a much stronger position,” Obama said.

The goal is to finish the bankruptcy in 30 to 60 days, people familiar with the plan said.

Chrysler’s best assets would be sold to a new entity that would have an ownership structure similar to that envisioned in an out-of-court deal between the U.S. automaker and Turin, Italy-based Fiat, said the people, who declined to be identified because discussions are private.

Administration officials were still resolving outstanding issues and the plan wasn’t finished, one of the people said yesterday.

‘Stream of Subsidies’

“I don’t think there should be a stream of subsidies to automakers, but helping them to restructure now,” when sales have collapsed, is “realistic,” Obama said.

Chrysler is expecting the Obama administration to say today whether the company has met all of its requirements to go ahead with the proposed alliance with Fiat, Chief Executive Officer Robert Nardelli said in a note to employees. Nardelli is likely to be phased out once Fiat takes over and is welcome to stay through a transition period, a person familiar with the situation said.

As part of negotiations, the U.S. Treasury raised its offer to Chrysler’s lenders to $2.25 billion in cash to forgive $6.9 billion in secured debt, two other people familiar with the matter said. The previous offer had been for $2 billion in cash.

Nardelli said yesterday in a different memo to employees that the company is waiting to hear whether its 46 lenders will agree to wipe out the debt.

Reason for Filing

One reason for filing a bankruptcy is to deal with the lenders who turned down administration loan-reduction proposals. Those 20 investment firms and other lenders include steering committee members OppenheimerFunds Inc., Perella Weinberg Capital Management LP and Stairway Capital Advisors, a person representing the group said, asking not to be identified.

Dan Arbess, a partner for New York-based Perella, didn’t return calls for comment. Jack Brown, an analyst for New York- based Oppenheimer, declined to comment. Stairway principal John Rijo said the Uniondale, New York-based fund would be issuing a statement later today.

The dissident group made a counteroffer of $2.5 billion late yesterday, said a representative of one of the funds, who asked not to be identified because the talks are confidential.

In bankruptcy, the majority of the lenders who approved the $2.25 billion plan could force the minority to accept a payout similar to the rejected deal. The dissidents plan to object to the company bankruptcy plan to put its best assets into a new entity, said a person familiar with their thinking.

33 Cents on Dollar

The $2.25 billion offer would have returned about 33 cents on the dollar at the face value of the loans. The dissidents would be betting they could do better than that in bankruptcy.

The group of 20 holdouts said today they have a $1 billion in obligations from the automaker. They alleged in an e-mailed statement that they were barred from negotiating directly with the federal government.

The group said it was forced to talk with the Obama administration through banks that had received government bailout money under the Troubled Assets Relief Program who are “conflicted,” according to a statement.

“We are continuing to discuss our position with the United States Treasury,” the group said. “We have made a proposal which we earnestly believe is fair and would appropriately recognize our legal position.”

Cerberus Capital Management LP owns 100 percent of Chrysler after taking Daimler AG’s 19.9 percent stake earlier this week. The New York-based private-equity firm has said it will give up its ownership stake to allow for Chrysler’s restructuring.

Out of Court

In the deal envisioned out of court, Fiat would become a 20 percent owner of Chrysler, and a union retiree health-care trust fund would hold 55 percent, with the rest of the company staying in the government’s hands initially, the people said.

Fiat and the company’s new board would pick a CEO and chairman, Nardelli said in a Feb. 17 memo to workers. Fiat’s chief, Sergio Marchionne, said in an April 15 interview that he would be willing to run Chrysler if asked.

Chrysler has made progress in its out-of-court restructuring, including reaching cost-saving labor deals with the United Auto Workers union and Canadian Auto Workers. The CAW ratified its contract over the weekend; UAW members approved the deal yesterday.

The administration set a deadline for the lenders of 6 p.m. yesterday, said a person familiar with the matter. Shawn Morgan, a spokeswoman for Chrysler, declined to comment. Jenni Engebretsen, a Treasury spokeswoman, didn’t immediately return an e-mail seeking comment.

Government Effort

One issue remaining is the U.S. government’s effort to combine Chrysler Financial and GMAC LLC, the lending units affiliated with Chrysler and General Motors Corp.

The government seeks to ensure that Chrysler has a well- capitalized credit arm, as required by Obama’s automotive task force, said people familiar with the situation.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has expressed concern that such a combination would involve her agency guaranteeing its debt, according to two people familiar with her views.

Bair is reluctant to be drawn into bailing out auto-finance companies to the potential detriment of the FDIC’s deposit insurance fund, according to the people, who asked not to be identified because the discussions are private.

Andrew Gray, an FDIC spokesman, Amber Gowen, a Chrysler Financial spokeswoman, and Gina Proia, a spokeswoman for GMAC, declined to comment.

Fiat will produce its first model with Chrysler in 2011 if the accord between the companies is approved, Marchionne said March 27.

Producing Models

Chrysler is considering producing models in the U.S. based on Fiat’s 500 small car, Punto and Panda, said Steve Landry, executive vice president of sales, in a Jan. 23 interview. Fiat- based models will need engineering changes to comply with U.S. emissions rules, and Chrysler may use more powerful engines to match consumer preferences.

In its Feb. 17 viability plan, Chrysler forecast $6.9 billion of cost savings and additional revenue with Fiat through 2016, with a boost to earnings of at least $1 billion starting in 2012. Fiat and Chrysler will develop seven new small cars, according to the plan.

Fiat has been trying to bring back its main brands in the U.S. after 14 years and had held talks with the three U.S. automakers last year on possible cooperation on production of Alfa Romeo cars. Marchionne also held talks with governments including Ontario for possible production in North America, before officially postponing the plan in October to 2011.

Marchionne restored profit at Fiat in 2005 after introducing new models and sharing more components among cars and through cooperative projects with competitors. Fiat has several partnerships including ventures or joint projects with PSA Peugeot SA, Ford Motor Co. and Tata Motors Ltd.

To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Michael Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net; Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net.

Last Updated: April 30, 2009 11:38 EDT