May 19 (Bloomberg) -- Bankrupt Chrysler LLC’s pension plans may be underfunded by more than $10 billion, the federal Pension Benefit Guaranty Corp. has estimated.

If the pensions are terminated, the agency’s claim for the shortfall in the automaker’s bankruptcy case “would exceed $9 billion,” Chrysler lawyers said in a filing today in U.S. Bankruptcy Court in New York.

Chrysler is seeking approval of a settlement among the company, the PBGC, Cerberus Capital Management LP and Daimler AG to partly fund the plans and avoid such a termination. Chrysler’s proposed sale would extinguish Daimler’s $1 billion guaranty securing the pensions, according to the filing.

Under the proposed settlement, Daimler will make $600 million in planned cash contributions to the pensions while reducing its $1 billion pension guaranty to $200 million, leaving it in place even after the sale is completed. Daimler will also forgive a $1.5 billion loan to Chrysler while Cerberus will forgive a $500 million loan, according to court papers.

In exchange for the payments, Chrysler, Cerberus and Daimler will waive all claims against each other related to Cerberus’s acquisition of most of Chrysler in 2007.

“PBGC will work with Chrysler, its unions and all other stakeholders to ensure continuation of the pension plans,” Gary Pastorius, a spokesman for the government pension agency, said in an e-mail. “If possible, we want to avoid plan termination and putting the participants or the pension insurance program at risk.”

A hearing on the settlement is scheduled for May 27.

Loan Write-Off

Daimler said before the Chrysler’s bankruptcy filing in April that it would cede its remaining 19.9 percent stake in the automaker to majority owner Cerberus and write off the $1.5 billion loan to help the company avoid bankruptcy.

Chrysler won approval to auction most of its assets with a group consisting of Italy’s Fiat SpA, a United Auto Workers union benefit trust and the U.S. and Canadian governments as the lead bidder. Chrysler’s 22 U.S. factories, with about 26,800 hourly workers, were idled on May 1.

At the time of its bankruptcy filing, Chrysler was paying health care and other benefits costs for more than 105,000 retirees. The company has 10 different defined benefit pension plans.

Having the proposed retirement system contributions from Daimler “will eliminate the threat of the PBGC terminating the Chrysler pension plans prior to the consummation of the sale,” according to Chrysler.

The case is In re Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

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

Last Updated: May 19, 2009 17:13 EDT