The New York Times, citing unnamed sources, reported that the Treasury Department was preparing a Chapter 11 bankruptcy filing for the company that would protect pension and retiree health benefits.
An administration official said that while there is "speculation until there's a deal. It should surprise no one that the administration is planning on contingencies."
The official stressed that the Obama administration is focused on working with all of Chrysler's stakeholders in order to find a working partnership between Chrysler and Fiat.
In a statement issued this evening, Chrysler did not directly mention the possibility of bankruptcy but did say that "it's important to keep all options open."
"Chrysler will continue to work through the end of the month, based on the direction given by the Presidential Auto Task Force, to secure the support of the necessary stakeholders and reach a successful conclusion that the Administration and U.S. Treasury deems appropriate," the company said.
The automaker also touted its potential alliance with Italian automaker Fiat. The government has previously said that it would only continue providing financing to struggling Chrysler if it reached an alliance deal with Fiat by April 30.
"Chrysler has consistently said that its viability will be enhanced through an alliance with Fiat, as it represents a change in the company's business model that expands its global competitiveness," the company said.
David Cole, the chairman of the Center for Automotive Research, suggested that the bankruptcy threat might improve prospects for the Chrysler-Fiat deal.
"The higher the level of threat of bankruptcy, the better chance of a deal to avoid bankruptcy," Cole said.
That "doesn't meant it won't occur," Cole said, but without being "at death's door, you are not going to get people to come to a deal."
"This is going to be a game on the edge, it's not going to be neat and clean," he said.
More Money for Chrysler?
The Obama administration has told Chrysler it would provide the company with up to $6 billion in financing if it completed the Fiat deal by the end of the month.
The government already has provided Chrysler, the nation's third biggest automaker, with $4 billion in loans through the Troubled Assets Relief Program (TARP) established last fall to stabilize the financial system.
A report from the inspector general for TARP, released this week, revealed that the Chrysler will receive up to $500 million in additional working capital as while it completes its restructuring plans.
Amid the recession, automakers worldwide have seen sharp declines in auto sales; General Motors and Chrysler sought aid from the government to help weather the slump. The government, in return, asked the companies to make changes -- including improving product lines and gaining concessions from bond holders and union workers -- to improve their prospects for regaining profitability.
Sales of Chrysler vehicles dropped more than 39 percent in March compared to a year ago.
General Motors, the country's largest automaker, has received more than $13 billion in government financing. Ford, the second largest U.S. car company, opted against requesting government funds.
In the plan Chrysler submitted to the government in February outlining how it would return to profitability, the company said bankruptcy would cost an estimated $24 billion. If the automaker could not find a lender to keep the company operating while in bankruptcy, it would have to liquidate.