WASHINGTON - February 9, 2009 - General Motors Corp. and Chrysler LLC may be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup, Inc., JPMorgan Chase & Co., and Goldman Sachs Group, Inc., according to loan agreements posted on the U.S. Treasury’s web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called “debtor in possession” or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

“They are negotiating to see if they can reach an agreement,” said Workman, a bankruptcy lawyer based in Washington, D.C. “If not, they are saying, ‘We are pretty darn sure that a bankruptcy judge will allow us’ to be first in line for repayment.”