updated 5/28/2009 12:57:03 PM ET 2009-05-28T16:57:03

Chrysler on Thursday launched into its second day of testimony in its bid to convince a bankruptcy judge that a deal with Italian automaker Fiat is the best way to save itself from liquidation.

The automaker needs U.S. Judge Arthur Gonzalez to approve the sale despite protests from a group of Indiana state pension and construction funds that hold less than 1 percent of Chrysler's secured debt. If Gonzalez OKs the sale, the automaker could emerge from bankruptcy protection within weeks.

On Wednesday, Gonzalez heard nine hours of testimony from Chrysler LLC and Fiat Group SpA officials that lasted into the evening. Testimony resumed Thursday morning, with James Chapman, an independent member of Chrysler's board, taking the stand.

Thursday's testimony, which also was to include that of Chrysler Chief Executive Robert Nardelli, was set to be followed by arguments from Chrysler and the various dissenters. Gonzalez said he was prepared to continue the hearing into Friday if needed.

Meanwhile, Chrysler's U.S.-based rival General Motors Corp. said Thursday that a committee of its bondholders has agreed to a sweetened deal proposed by the U.S. government to erase of the automaker's unsecured debt in exchange for company stock.

A person familiar with the deal said that it is probable GM will file for bankruptcy protection. The person asked not to be identified by name because discussions are still under way with the U.S. and Canadian governments and there is a small chance that the company could avoid a Chapter 11 filing.

Attorneys for Chrysler say unloading the company's assets to a group led by Fiat is its only hope to avoid selling itself off piece-by-piece. They say a leaner Chrysler could shift more easily to building smaller, more fuel-efficient cars.

But many Chrysler dealers, bondholders and former employees say they are being steamrolled by the exceptionally speedy bankruptcy court proceedings. Fiat could back out if the deal doesn't close by June 15.

Approval of the sale would put Chrysler on track for a quick exit from bankruptcy protection, defying skeptics who insisted such a filing would leave the automaker mired in court for many months.

Both Auburn Hills, Mich.-based Chrysler and Detroit-based GM have been hobbled by the health and pension costs of tens of thousands of unionized retirees, in addition to slumping sales.

The government has poured billions into the two companies, fearing the ripple effects of catastrophic job losses might push the economy into a depression. The pair employ more than 126,000 people in the U.S., and hundreds of thousands of others rely on the companies working for parts suppliers, dealerships and other related businesses.

Bringing Chrysler and Fiat together would dramatically change the face of the country's third-largest automaker. The current plan calls for Fiat to bring a handful of its small cars to the U.S. in the coming years, filling one of Chrysler's biggest product gaps and pleasing a White House intent on making the nation's fleet of automobiles greener.

Chrysler itself entered bankruptcy protection with a handful of new vehicles in the works. It plans to begin selling an electric car next and have six electric vehicles on the road by 2014.

Even if Chrysler comes out of bankruptcy protection, its challenges are just beginning. Until the Fiat vehicles arrive, it will have to rely on a product lineup that lost billions of dollars last year.

Alfredo Altavilla, Fiat's chief executive for powertrain technologies and head of business development, testified Wednesday that he expects it to take about 18 months to begin producing Fiat vehicles at Chrysler facilities and about 24 months to start producing powertrains for those vehicles in North America.

Even then, there is no guarantee Fiats will sell in this country, where they will compete against small cars from established automakers like Hyundai and Kia.

Some of the strongest opposition to Chrysler's asset sale has come from lawyers representing a pair of Indiana state pension funds and a state construction fund that bought Chrysler debt last year. The Indiana state funds bought Chrysler debt last year and hold a combined $42.5 million of the company's total $6.9 billion in secured debt.

The funds have said they oppose the sale because it puts the interests of unsecured creditors, such as the United Auto Workers union, ahead of theirs and those of other secured debtholders.

In the days leading up to its Chapter 11 filing, Chrysler reached an agreement with most of its bondholders in which they would receive a combined $2 billion in a deal worth 29 cents on the dollar, but some bondholders refused to support it, saying that as secured lenders they deserved more. That failure to reach full agreement tipped the company into bankruptcy court.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.40%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.70%
13.70%
Cash Back Cards 17.66%
17.91%
Rewards Cards 17.05%
17.17%
Source: Bankrate.com