Nov. 12 (Bloomberg) -- Delphi Corp., the former parts unit of General Motors Corp., could be forced to liquidate its U.S. operations if its former parent also seeks bankruptcy.

Delphi, based in Troy, Michigan, is struggling to emerge from a bankruptcy case that began in 2005. It's already relying on Detroit-based GM to contribute about $10.6 billion to its restructuring by assuming pensions and amending contracts.

GM last week reported a $4.2 billion third-quarter operating loss and said it may run short of cash by the end of the year unless the auto market improves or it raises capital.

``If GM fails, it's likely the Delphi reorganization fails, and Delphi converts to a case under Chapter 7 -- a liquidation,'' Nancy Rapoport, a law professor at the University of Nevada-Las Vegas, said today in an e-mail. ``For the creditors of Delphi, this of course isn't optimal, and the usual issues in Chapter 7, determining the liquidation value of the company, will apply.''

Delphi said in a court filing today it would postpone a hearing on changes to its turnaround plan to Dec. 17. The hearing in New York was previously scheduled for Oct. 23.

U.S. Bankruptcy Judge Robert Drain in January confirmed a Delphi turnaround plan that would have paid unsecured creditors in full. The plan faltered when an investor group led by Appaloosa Management LP backed out of a deal to buy as much as $2.55 billion in Delphi securities, saying the company was too reliant on GM. Delphi sued Appaloosa while also seeking to amend its plan, cutting payouts to creditors so it could emerge with less financing.

`Catastrophic Impact'

``Obviously, any catastrophic impact to GM will impact us,'' said Lindsey Williams, a Delphi spokesman. ``It would impact Delphi's ongoing transformation.'' He declined to comment on whether a GM bankruptcy would force a liquidation of the company's U.S. operations.

There hasn't been any change in GM's agreements with Delphi, said GM spokeswoman Renee Rashid-Merem. Chief Executive Officer Rick Wagoner has said the automaker doesn't plan to file bankruptcy.

Daniel Kasper, a managing director at the consulting firm LECG in Boston, said it was unlikely GM could avoid bankruptcy because secured creditors might seek to force the company into court protection.

``If GM fails, Delphi will join a long list of people with problems,'' he said, noting the parts-maker would have to deal with a lack of backing and the drop-off auto production. ``It complicates things immensely.''

One thing that could potentially save Delphi is that it's GM's largest supplier and, if it was liquidated, GM might be unable to build cars.

`Not an Option'

``As long as GM needs Delphi parts, a shutdown of Delphi is not an option,'' Martin Bienenstock, a Dewey & LeBoeuf partner who has represented GM in Delphi matters, said in an e-mail. ``Predictably, the parties are doing what's necessary to keep Delphi operating.''

GM, Ford Motor Co. and Chrysler LLC would get $25 billion in loans from the U.S. Treasury's financial-rescue plan under a proposal by House Financial Services Committee Chairman Barney Frank. Frank said he plans to introduce the bill Nov. 18 and hold a hearing on it the following day.

If GM seeks bankruptcy, it may argue that Delphi is a so- called critical vendor and must be paid ahead of other creditors, said Donald Workman, who heads the bankruptcy and creditors' rights practice at Baker Hostetler's Washington office.

Transferring that much money out of GM's estate to Delphi could ``agitate some creditors,'' including the Pension Benefit Guaranty Corp., he said.

Pension Liability

The PBGC is a federal agency that insures the private pensions of almost 44 million Americans. The transfer of $3.4 billion of Delphi's pension liability to GM in September won praise from the agency and prevented it from putting a lien on Delphi's foreign operations. In bankruptcy court, GM could seek to pass those pension costs to the government.

Delphi has said its goal is to emerge from bankruptcy as soon as it is feasible. The company seeks court approval to continue using proceeds from $4.35 billion in bankruptcy loans through June 30 without penalties, though the loan package expires at the end of this year. In a Nov. 7 court filing, Delphi said it expects to have consent for that change from a sufficient number of its lenders before a Nov. 24 hearing.

Separately, the company is trying to line up about $3.75 billion in loans to finance its exit from bankruptcy. To smooth Delphi's reorganization, GM agreed to take stock instead of cash and may share its payout with Delphi's unsecured creditors under the amended turnaround.

The case is In re Delphi Corp., 05-44481, U.S. Bankruptcy Court, Southern District New York (Manhattan).

To contact the reporter on this story: Christopher Scinta in New York at cscinta@bloomberg.net.

Last Updated: November 12, 2008 19:47 EST