Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

If an agreement with the car maker’s lenders can be reached, Chrysler would file for bankruptcy protection to rid itself of some liabilities. That would let Fiat pick and choose which operations it wants, these people said. The U.S. government would provide bankruptcy financing while the reorganization plays out.

The United Auto Workers union is on board with the plan and likely would end up owning a sizable stake in the restructured car maker, said these people.

A relatively orderly bankruptcy filing along these lines would represent a measure of success for the Obama administration. But if a deal with Chrysler’s banks and Fiat cannot be reached, the company would begin the process of liquidation, with assets potentially sold to many buyers or shut down, said these people. Chrysler has shrunk radically in recent years but still employs 66,000 people in the U.S.

Meantime, Fiat has begun talks with General Motors Corp. about joining forces in Europe and Latin America, people familiar with the matters said, a surprise move that could have profound implications for the restructuring of GM and Chrysler. GM and Fiat have begun discussions about the Italian company buying a majority stake in Opel, the heart of GM’s European unit, these people said.

But no GM deal would go forward until Fiat’s plans with Chrysler are settled. Fiat has said it wants to take an initial 20% stake in Chrysler.