President Barack Obama said the US and Canada will commit more money to Chrysler as it forms an alliance with Fiat that will give the carmaker a “strong chance of success.”
As part of the deal to get as much as $3.5 billion in operating loans from the US government, Chrysler will file for bankruptcy in New York, a process that an administration official said should be completed within two months.
"The necessary steps have been taken to give one of America's storied automakers, Chrysler, a new lease on life," Mr Obama said in remarks at the White House. "This process will be quick, it will be efficient."
The president faulted some of Chrysler's smaller lenders, including hedge funds that he didn't name – "a small group of speculators" - who refused to make the concessions agreed to by the company's major debt holders and workers.
There will be no immediate plant closures or job cuts as a result of the bankruptcy filing. Chrysler will be sold to a new company created by the government using a provision of Chapter 11 of the US bankruptcy code.
The Canadian government will contribute a portion of the funding for Chrysler's so-called debtor-in-possession financing. Chrysler will name a new board of directors, an official said.
As part of the agreement, Fiat will make engines and cars in the US, the official said. Fiat will gain 15 per cent more ownership of Chrysler by hitting three goals, including providing international distribution for Chrysler vehicles, building a car that gets 40 miles per gallon in the US and putting a new fuel-efficient engine in a US plant.
"Every dime of new taxpayer money will be repaid before Fiat can take a majority ownership stake in Chrysler," Mr Obama said.