GENERAL MOTORS is preparing to file for bankruptcy protection as early as May 31st, under a plan in which the US government would cancel most or all of its existing debt in the company and invest in a “new” GM that could emerge from bankruptcy in the autumn.

GM would receive tens of billions of dollars in new government money, probably in a series of stages, to prop up its business at a time when car sales are threatening to be lower than the 10-million annual rate at which GM says it can break even, said a person close to the matter.

The government will cancel its existing debt in GM, the largest US carmaker, the person said, but it may keep a slice of debt in the “old” GM assets that are wound down in bankruptcy in order to retain leverage over the process.

GM would aim to win bankruptcy court approval by July 1st for a plan to separate its good brands and assets into a viable company.

It would start marketing itself as a cleanly-scrubbed company immediately.

It could take several more months, however, for the new GM to be technically freed from the bankruptcy process.

GM’s transfer of assets into the new company will occur on a rolling basis, sources said, as details are hashed out. GM’s advisers are still working on plans to wind down the assets that will remain under bankruptcy protection, and are trying to develop an accounting system that can handle the new and old companies separately.

GM’s bankruptcy preparations are occurring independently of Chrysler, which filed for creditor protection at the end of April.

A key hearing to endorse Chrysler’s exit plan, however, is set for next Wednesday, and one insider said the Obama administration would like to see the plan approved prior to a bankruptcy filing by GM.

GM is likely to file for bankruptcy protection even if 100 per cent of its bondholders agree to a costly debt swap proposed by the company and the government, said sources close to the company.

An agreement looked unlikely yesterday, after a bondholder committee said that it would reject the offer amid claims by Republican lawmakers that bondholders’ rights were being subverted.

A bankruptcy filing would let GM cancel its dealer contracts rather than having to buy them out one by one. It would also allow the new company to protect itself from GM’s present liabilities over civil lawsuits, asbestos claims and other environmental issues.