However, an Obama administration official characterized the preparations as contingency planning, which Sen. Debbie Stabenow, D-Mich., also emphasized Thursday. "They are preparing all options," Stabenow said.

Chrysler faces a Thursday deadline to cut labor costs and shed debt or be reorganized in bankruptcy.

The Free Press previously reported that the Obama administration wants to protect retiree health care, often a target for reduction in a bankruptcy, to a greater degree than the debt of banks and bondholders. 

Any promise to protect UAW benefits could stiffen the resolve of creditors holding $6.9 billion in secured loans. They already contend the UAW is receiving preferential treatment. President Barack Obama's auto task force asked creditors Wednesday to reduce their loans to $1.5 billion in exchange for 5% of the restructured company.

"The taxpayer will be on the hook for billions of dollars," subsidizing pensions and health care for retirees under 65, said Peter Morici, a University of Maryland economist. "Or the entity that emerges from bankruptcy will be crippled and require continuous government subsidies." Detroit Free Press