Chrysler faces its day of judgment on Wednesday as a bankruptcy court judge rules on a sale of its key assets to give the ailing automaker a fresh start in a partnership with Italy's Fiat.
If Judge Arthur Gonzalez approves the fast-track plan, a new Chrysler could emerge within days, according to President Barack Obama's administration, which is spearheading the plan and providing emergency funding.
The developments with Chrysler are seen as critical for General Motors, which is also living off government loans and scrambling ahead of a June 1 deadline imposed by the Obama administration that will likely lead to a bankruptcy filing.
In the Chrysler case, a US Treasury court filing last week said that if the plan is approved by Gonzalez, the sale would likely close by Friday "and the launch of a new Chrysler achieved."
A source familiar with talks on Chrysler said the rebirth of the new firm was now "pretty close," adding, "It won't be this week necessarily but it should be close."
Although the "old" Chrysler may still be subject to a long period of court supervision, the new firm led by Fiat executives would be able to begin operations with Chrysler's plants and workers, but freed of much of its debts and legacy costs.
The third-largest US automaker was forced to file for bankruptcy protection on April 30 and agreed to an alliance with Fiat that will initially give the Italian company a 20 per cent stake.
In return, Fiat will allow access to its technology to enable the US carmaker to make the smaller, greener cars that are increasingly in demand.
The US Treasury has provided Chrysler with some nine billion dollars in emergency aid. Fiat must repay this money if it wants to take a majority stake in the Detroit firm.
Chrysler cleared a potential hurdle on Tuesday as a district court judge rejected an effort to take the case out of bankruptcy court for a full hearing on the legal rights of some creditors.
The ruling in New York federal court opened the door for Wednesday's hearing before Gonzalez on the fast-track plan.
"We are pleased with the judge's decision to deny the withdrawal (from bankruptcy court) and therefore deny the motion for a stay" that would delay the case for a full hearing, Chrysler said in a statement.
Any delay would have been a major setback for Chrysler and the Obama administration, which aims for a rapid bankruptcy exit to restart factories and revamp operations.
Robert Kidder, ex-chairman of Borden Chemical and Duracell International, was to take over as chairman at Chrysler from Robert Nardelli upon the exit from bankruptcy.
Fiat chief executive Sergio Marchionne was expected to hold the same title at Chrysler after its bankruptcy exit.
GM meanwhile was widely expected to file for bankruptcy protection ahead of a June 1 deadline imposed by the Obama administration, which is providing GM with emergency cash.
However a source familiar with the talks said the GM road to bankruptcy was expected to be thornier than Chrysler's.
"It seems like almost every day we come upon some issue or question that didn't exist with Chrysler," said the source on condition of anonymity.
"We do expect it to be a more complicated process and a longer process (in bankruptcy)."
In the cases of both GM and Chrysler, a major legal question is whether holders of bonds and other forms of secured debt can be forced into bigger concessions than other stakeholders.
GM bondholders have balked at a plan that would give them some 10 percent of the new company in exchange for 27 billion dollars in debt.
Some legal and financial analysts argue that the GM and Chrysler plans set a dangerous precedent by wiping out more debts from secured financial creditors, which should be given priority in bankruptcy.
GM last week reached a tentative deal with the United Auto Workers union on cost-saving concessions that still must be ratified by rank-and-file workers.
The union was set to receive a 39 percent stake in exchange for forgiving a 20 billion dollar debt to a retiree health care trust fund.
But in a deal reached last week, it agreed to substantially lower that stake to 17.5 percent of GM's common shares in exchange for job protections, 6.5 billion dollars in preferred stock and 2.5 billion in cash.
It was not clear where the remaining stake would be allocated, although it could be used to help sweeten a deal offered to bondholders.