General Motors Corp., the world’s largest automaker until its 77-year reign ended in 2008, plans to file for bankruptcy protection on June 1 and sell most of its assets to a new company, people familiar with the matter told Bloomberg.com.

The U.S. Treasury will provide financing while the asset sale is arranged to a company formed by the government, GM said in a regulatory filing. GM’s path will be smoothed by an agreement today with some of its biggest bondholders on terms for an equity stake in the reorganized automaker.

GM, which would follow Chrysler LLC into bankruptcy, plans to build its new business around assets such as the Cadillac and Chevrolet brands. The 100-year-old automaker, battered by tumbling sales, fell short in a bid to cut debt by $44 billion by the U.S.-set June 1 deadline to restructure outside court.

“By freeing GM of tens of billions of dollars in debt, bankruptcy will give it a new lease on life,” Lynn LoPucki, a law professor at the University of California, Los Angeles, said before the news of Detroit-based GM’s strategy.

The people familiar with GM’s plans didn’t specify where the automaker might execute its Chapter 11 filing.
Steve Harris, vice president of communications for GM, declined comment.

GM’s bankruptcy will be the third biggest in U.S. history after Lehman Brothers Holdings Inc. and WorldCom Inc., based on GM’s reported global assets of $91 billion and total liabilities of $176.4 billion as of Dec. 31. Chrysler, which sought court protection on April 30, listed assets of $39 billion.

The filing would end the suspense for GM, which said it expected to declare bankruptcy after failing to get enough support for a debt-for-equity exchange on $27.2 billion in unsecured bonds.

Only 15 % of bondholders reportedly approved the offer to trade their debt for a 10 % stake in the new company. GM sweetened the plan today to promise warrants good for buying 15% more of the new enterprise, which would have an improved balance sheet based on a U.S. plan to trade bailout loans for equity.

Another 20 % of bondholders now supports the swap, according to a statement from the investors today.

Bondholders would lose some or all of the warrants and their 10 % stake in the new GM entity unless the company wins sufficient bondholder support to satisfy the Treasury by 5 p.m. New York time on May 30, according to a GM regulatory filing today.

A plan in the filing shows the U.S. Treasury owning 72.5% of equity in the new GM, a union health-care trust with 17.5% and 10% going to the old GM to hand to creditors in the bankruptcy process.

The plan calls for debt to be carried by the new GM that would consist of $8 billion in new loans from the Treasury, $2.5 billion owed to the United Auto Workers fund and $6.5 billion in dividend-paying preferred stock. Treasury will get $2.5 billion in preferred shares that pay a 9% annual dividend, bringing the issuance to $9 billion in preferred stock.

GM’s revised offer “represents the best alternative for bondholders in the current difficult and dire situation,” the investors said.

The accord with bondholders marks “another important step” in GM’s restructuring, an Obama administration official said in Washington.