Chrysler went into bankruptcy because creditors wouldn’t agree to be wiped out.  They may believe that they will do better in front of a bankruptcy court, or some of them may have credit default swaps (CDSs) and have wanted Chrysler to go under so they would be paid off at full dollar (which points out another problem with CDSs, that they make bondholders more willing to force companies into bankruptcy.)

The government’s plan is to have a quick 30 to 60 day bankruptcy, shed the debts, and come out of it with the United Auto Workers owning 55%, the US government 8%, the Canadian and Ontario sharing 2% and Fiat receiving 10% with the possibility of more.

But bankruptcy court is not a sure thing.  The bankruptcy judge will have discretion and there are laws to be followed.  It is by no means a sure thing that this plan will survive contact with the court.  The debt holders will go to the judge and argue that they deserve to own much more Chrysler or that it should be broken up and that their claims take precedence.

I don’t know if they’ll succeed.  Certainly the government will put all their weight behind the current plan.

The next question, then, is GM, where the same calculation is playing out: a lot of debt holders think that they can do better in bankruptcy than through the government plan.  How the bankruptcy judge starts ruling in the first days of Chrysler’s bankruptcy will have a lot to do with whether GM debt-holders crumble.  If the judge seems ready to ram through the government plan, then GM probably won’t go bankrupt.  If he isn’t, it probably will.  Assuming of course that enough debt-holders don’t have CDSs covering their GM debt.  If they do, well, it’s in their interest to crash the company no matter what.