Chrysler is set to become the first of the Detroit “Big Three” carmakers to be made bankrupt.
The company filed for bankruptcy protection as it was announced that a rescue deal with Fiat of Italy had been reached.
President Barack Obama said the partnership would give the US’s third largest car manufacturer a chance “not only to survive but to thrive”.
But he also angrily hit out at a small group of hedge fund creditors who held out for an “unjustifiable” taxpayer bail-out for Chrysler, necessitating the move into Chapter 11 bankruptcy.
Last year Chrysler posted an $8 billion (£5.4 billion) loss and has received $4 billion (£2.7 billion) in emergency loans from the government as it struggles to survive.
Chapter 11 of the US bankruptcy code will allow the company to restructure without having to enter into liquidation.
As such it will be allowed to continue to operate as a going concern as it clears away its remaining obligations ahead of a formal tie-up with Fiat.
The move yesterday came hours before a deadline set by the White House for Chrysler to come up with an agreement with the Italian car-maker.
The deal with Fiat, which skirted bankruptcy itself a few years ago, will see Fiat take an initial 20 per cent stake in the 84-year-old company and it is expected to take a majority stake once the government loans have been repaid.
Analysts, however, said that even with Fiat waiting in the wings the move into bankruptcy would send shock waves through the once proud US automotive industry.
And there were fears about the impact it could have on Detroit and the state of Michigan.
Moody’s, the credit rating agency, said: “The industry’s current crisis, with the potential for bankruptcy or consolidation, represents a fundamental shift in the state’s economic base, rather than a simple cyclical downturn.”
Negotiations to salvage Chrysler have been conducted by the Obama administration’s auto task force headed by former investment banker Steve Rattner.
Chrysler, whose current majority owner is Cerberus Capital Group, is the smallest of the Detroit Big Three – behind General Motors and Ford. It is the biggest recessionary casualty so far of an industry that until recently employed more than nine million people and whose revenues, $2.6 trillion, were equivalent to the GDP of France.
For more than 80 years Chrysler has been at the heart of the US automobile industry. Its Dodge and Plymouth models became classic muscle cars of the 1960s, while a merger in the 1980s brought the Jeep brand under its wings.
As its website proudly boasts, Chrysler has become “part of the industrial backbone of America”. It currently employs 100,000 people across all of the US’s 50 states.
The company was started by Walter Chrysler, a former GM worker who parted ways with the car maker in 1919 to set up a second career as a “doctor of ailing automakers”.
In 1928 Chrysler bought Dodge Brothers, elevating the firm into the ranks of the US’s automobile giants.
The company is credited for bringing in a number of innovations in car manufacturing and design, including power steering, the alternator and electronic fuel injection.
In also came up with the world’s first streamlined car, the 1934 Chrysler Airflow. Its power cars, such as the Dodge, helped develop the classic muscle car image of the US during the 1950s and 1960s.
In 1987 it added Jeep to its range of vehicles.
Alongside its cars, the company is also responsible for one of New York’s most famous buildings, the Chrysler Building. The Art Deco structure was built between 1928 and 1930 after Walter Chrysler bought the design and lease.