General Motors is in "intense" and "earnest" preparations for a possible bankruptcy filing, a source familiar with the company's plans told Reuters Tuesday.

A plan to split the corporation into a "new" company made up of the most successful units, and an "old" one of its less-profitable units, is gaining momentum and is seen as the most sensible configuration, said another source familiar with the talks.

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The sources requested anonymity because they were not authorized to speak on the record.

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If the plan goes through, the new GM would be expected to assume some previous creditor debt from bankruptcy proceedings, such as secured debt, said the second source, adding that GM bondholders were likely to lose substantial value in bankruptcy.

Certain GM dealer and litigation claims would also be hurt if the new company structure is used as part of a company bankruptcy, said the second source. GM declined to comment.

GM Chief Executive Fritz Henderson has said the company prefers to restructure out of court but that it could go to court if needed. GM, operating on $13.4 billion of government loans since the start of the year, has until June 1 to complete a reorganization plan.

The government has warned that the alternative would be bankruptcy.

The company is under pressure to cut unsecured debt by two-thirds, turn half its remaining payments into a union healthcare trust in the form of equity rather than cash, and reduce hourly wages and benefits to match those paid by foreign automakers.

Chrysler, owned by Cerberus Capital Management LP, is also facing possible bankruptcy. The automaker has until April 30 to complete an alliance with Italian automaker Fiat.

Moody's Investor Service said in a note dated Monday that it maintains its view for a 70 percent risk of bankruptcy for Detroit's three automakers given the difficulty of restructuring out of court.

Canadian Moves

Canadian Industry Minister Tony Clement said on Tuesday that the Canadian government must be prepared for GM or Chrysler to enter bankruptcy protection.

But the Canadian government announced Tuesday that it will guarantee the warranties of cars sold by GM and Chrysler under a new program to help prop up the struggling carmakers, even as Ottawa said it must be ready for their possible bankruptcy.

Late last month the Canadian government—which says a disorderly bankruptcy in the sector would cause enormous damage—rejected restructuring plans presented by both companies but announced  $3.2 billion in bridge financing for them.

Warranties on new vehicles will be guaranteed by a C$185.3 million commitment program, regardless of whether Chrysler and GM go into bankruptcy protection.

The program will be funded with cash contributed by the automakers and a loan from the federal government to pay for repairs covered by the automakers' warranties on each new vehicle sold until "the period of uncertainty" ends. The United States has already announced a similar measure.

Bankruptcy not an easy drive

Some bankruptcy experts say a Chapter 11 bankruptcy filing could help GM reorganize by allowing it to restructure its debt and force changes to contracts with dealers, unions, and suppliers.

But the process could be disruptive, or derailed, said Patrick Carothers, a partner at Thorp, Reed & Armstrong LLP.

For example, if auto-parts makers lose the ability to collect money owed, the industry as a whole could suffer.

In addition, GM could lose control over its restructuring as the formation of a new company would be in the hands of a bankruptcy judge, not corporate executives or their advisers.

"The dangers of a bankruptcy are significant," said Carothers, who has parts suppliers and car dealers as clients. "I don't believe a bankruptcy is inevitable. There's still a lot of political pressure to save it."

GM shares were down 13.66 percent, or 31 cents, to $1.95 in midafternoon trading on the New York Stock Exchange, after reaching a session low of $1.95 earlier in the day.

GM's bonds were steady to slightly lower in late morning trading. GM's benchmark 2033 bond slipped, with the 8.375 percent bond trading at 12 cents on dollar, compared with 12.75 cents before the news came out, according to MarketAxess data.

The bonds closed at about 11 cents on Monday, according to MarketAxess data.

Last month, GM offered bondholders 8 cents on the dollar in cash, 16 cents on the dollar in new unsecured debt, and a 90 percent stake in the automaker, one person with knowledge of the term sheet told Reuters.

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