"No one should be confused about what a bankruptcy process means," Mr. Obama said. "This is not a sign of weakness but rather one more step on a clearly chartered path to Chrysler's revival."
As part of the deal, Chrysler is signing a partnership with the Italian company Fiat. The government will be an investor in the revamped Chrysler and will help choose its new directors, but the Obama administration does not plan to help manage the company.
The government of Canada is chipping in another $2.5 billion of aid for Chrysler. Mr. Obama and Canadian Prime Minister Stephen Harper released a joint statement Thursday afternoon thanking one another, the United Auto Workers , the Canadian Auto Workers, and Chrysler creditors for allowing the restructuring to take place.
Soon after Mr. Obama spoke, Chrysler CEO Robert Nardelli announced he wouldafter the automaker emerges from bankruptcy protection.
As the president announced the bankruptcy and restructuring of a company he called an American icon, Chrysler workers in Kokomo, Ind. watched in stunned silence. "Just kind of scared - you know, never thought I'd have to try to start over again when i got this job," Chrysler employee Brad Ice told CBS News business correspondent Anthony Mason.
Chrysler also said it would temporarilystarting Monday as part of the restructuring and the United Auto Workers union agreed last night to significant pay cuts as part of the restructuring. No further layoffs were planned, however.
Bankruptcy does not mean the No. 3 U.S. automaker will shut down. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company's creditors would get while the company continues to operate. The goal is for the whole process to happen quickly, Mr. Obama said, perhaps within a couple months.
Consumers can still buy a Chrysler, warranties will be honored, and dealerships will continue to offer repair service, reports CBS News correspondent Alexis Christoforous.
The union agreed last night to significant pay cuts. Further layoffs are not expected. But Chrysler will idle most of its plants during bankruptcy.
Typically bankruptcies last for months or years, but the stigma alone could be disastrous for Chrysler. A recent survey found that more than 90 percent of buyers wouldn't chose the brand if the company went bankrupt, Mason reports.
"So its critical that not just Chrysler, but General Motors clear the air here and get a clear direction of where they're going," said Gary Dilts of J.D. Power & Associates.
But Fiat hasn't had a presence in the American market since the early 1980s, when some buyers joked that fiat stood for "Fix it again, Tony," Mason reports.
The president said that Chrysler has been responsible for helping to build the American middle class, but over the years also had been weakened by "papering over tough problems and avoiding hard choices."
"For too long," Mr. Obama said at the White House, "Chrysler moved too slowly to adapt to the future, designing and building cars that were less popular, less reliable and less fuel efficient than foreign competitors." (Click here to read President Obama's full remarks)
The Obama administration said it had long hoped to stave off bankruptcy for the nation's third largest automaker, but it became clear that a holdout groupon proposals to reduce Chrysler's $6.9 billion in secured debt.
Mr. Obama praised the sacrifices made by the autoworkers' union and the majority debtholders, whose concessions gave officials hope that Chrysler would be able to restructure without filing for Chapter 11. But the small hedge funds who hold 30 percent of Chrysler's outstanding debt held out for "an unjustified taxpayer bailout," according to the president.
"I don't stand with them," Mr. Obama said. "I don't stand with those who held out when everybody else is making sacrifices."
Along with the Fiat deal, the United Auto Workers ratified a cost-cutting pact Wednesday night. Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler's debt in return for $2 billion in cash.
A third person briefed on Wednesday night's events said the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors.
Speaking of the hedge funds who rejected the deal, an official told CBS News "their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opportunity."
President Obama's auto task force in March rejected Chrysler's restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the federal government and needs billions more to keep operating. President Obama said Wednesday night while the lender talks were still ongoing that he was "very hopeful" that deals can be worked out to keep Chrysler LLC a viable automaker, and more hopeful than he was a month ago that the company will stay in business.
The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler's U.S. facilities and to share key technology with Chrysler.
Sergio Marchionne, CEO of the Italian automaker, told reporters earlier this month that he could run Chrysler. Mr. Obama said Wednesday that Fiat's management "has actually done a good job transforming their industry."
The U.S. and Canadian governments will own 10 percent of the new Chrysler. Fiat will own 35 percent. The majority, 55 percent, will be owned by the United Autoworkers.
"And probably for the first time ever, you're going to have a union that's really tied to the outcome of the outcome of the company in a way that they've never been tied before," Dilts told Mason.