NEW YORK (CNNMoney.com) -- Chrysler LLC is going to file for bankruptcy, an administration official confirmed to CNN Thursday.
The filing comes after some of the company's smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.
Chrysler officials had no comment on the bankruptcy report. The company faces a Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.
But the filing will not mean the halt of operations or liquidation for the troubled 85-year old automaker. Instead, the administration expects to use the bankruptcy process to join Chrysler with Italian automaker Fiat.
In addition, the United Auto Workers union announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified a concession contract reached between the company and union leadership on Sunday night.
President Obama said during a press conference Wednesday night that he was more confident than he had been 30 days ago that Chrysler would be able to emerge from the process as a healthy, competitive company. He is set to comment on the state of the auto industry at noon on Thursday.
The administration said Wednesday evening that talks with the smaller lenders broke down when they refused to meet a deadline set by the Treasury Department to accept pennies on the dollars they had loaned the company.
"After a month of tireless negotiations, the Administration went into yesterday afternoon with the full support of Chrysler's key stakeholders, including the [United Auto Workers union] and the largest creditors. That support remains," said an administration official.
Major banks such as Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) agreed to reduce their portion of $7 billion in secured loans to a more manageable $2.25 billion, according to the administration official. But some smaller lenders, including hedge funds, refused to accept the deal.
"The agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success," said the administration official.
"Their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official added.
Chrysler and the rest of the auto industry have been hit by a sharp plunge in sales due to the global recession and tighter credit. Chrysler's U.S. sales during the first three months of this year were down 46% from year ago levels. That followed an industry-worst 30% slide in sales last year.
Being privately held, Chrysler has not released its financial results for recent years. But the company needed a $4 billion federal loan in the closing days of the Bush administration to avoid running out of cash, while rival General Motors (GM, Fortune 500) received the first of what turned out to be $15.4 billion in federal loans so far.
Those federal bailouts staved off an uncontrolled bankruptcy at Chrysler that could have caused a rash of failures across the auto supplier industry and disrupted production at other automakers. Chrysler owes its suppliers about $7 billion, according to the latest figures available from the company. Some of those suppliers could still be hurt by the bankruptcy filing.
Chrysler asked Treasury for $6 billion in additional help in order to stay in business and weather the current crisis. But that amount assumed that Chrysler would not need to file for bankruptcy. It is possible that even more federal help may be required to fund operations during a bankruptcy reorganization.
Chrysler is only a fraction of its former self. It has about 39,000 U.S. employees, only about 40% of the total it had at the beginning of the decade. It has fallen behind not only Toyota Motor (TM) in sales, but it is close to being overtaken by Honda (HMC) for the No. 4 spot for U.S. sales.
The company also has about 3,300 dealers who between them have 140,000 employees. It also has 65,000 U.S. retirees as well as their family members who depend upon the company for pension benefits and heath care coverage.
It is not yet certain how many employees at Chrysler and its dealers will be affected by the company's bankruptcy.