The U.S. Treasury Dept. reportedly is laying the groundwork for Chrysler LLC to file bankruptcy as a pre-cursor to a deal to swap equity for technology with Italy’s Fiat Auto Group.

A report by The New York Times, citing people with direct knowledge of the action, says the government has reached a deal in principle with the United Auto Workers union on pensions and retiree health-care benefits ahead of the Chapter 11 filing, which could come as early as next week.

The deal with the UAW reportedly calls for the union to take half the $10.6 billion owed to its health-care trust fund in stock, with the balance to be paid in cash over the next decade.

Chrysler was given an April 30 deadline by the Obama Admin. to engineer an equity deal with Fiat or face liquidation, but it now appears a bankruptcy filing could be used to better position the U.S. auto maker for takeover.

Still unresolved, the paper says, is how Chrysler’s $6.9 billion in debt will be handled. The government’s latest offer calls for lenders to receive 22 cents on the dollar and 5% equity in the restructured Chrysler. Debt holders have been asking for 65 cents on the dollar, plus 40% equity, but reportedly are preparing another counter offer to be delivered tomorrow.

The bankruptcy filing would allow Chrysler to sell or close down operations and assets it doesn’t believe it will need and cancel franchise agreements with some dealers to thin its retail ranks ahead of the tie-up with Fiat.

The U.S. government reportedly would provide financing needed to keep Chrysler operating during the bankruptcy process, with some help from the Canadian government.

Once it emerges, Chrysler would be owned largely by Fiat, the UAW, the U.S. Treasury and its lenders, sources told The New York Times.

Earlier today, Fiat SpA CEO Sergio Marchionne said the Italian auto maker has “no interest” in “cherry-picking” assets from a Chrysler bankruptcy.

“I like Chrysler in its totality,” he said. “It’s an untimely question to ask about whether the spoils of Chrysler will be of interest to us (if) the deal doesn’t go through. (Fiat is) committed to getting this deal done on the terms that we’ve described. I think it will be beneficial to both Fiat and Chrysler.”

The proposed partnership would see Chrysler acquire access to vehicle platforms and powertrain products developed by Fiat. In return, Fiat would acquire an initial 20% stake in Chrysler that would grow to 35% as the auto maker achieves specific profit targets.

Fiat also would have an option to acquire, over seven years, an additional 16% share.