WASHINGTON

Mention a corporate bailout in the nation's capital these days and chances are someone will offer a harsh condition to go along with it. Chapter 11 bankruptcy.

Lately, the term "prepackaged bankruptcy" has been gaining currency in the halls of Congress as lawmakers struggle with pleas for help from the auto industry.

The idea, embraced by some Democrats and Republicans, would extend taxpayer help in exchange for a company undergoing an accelerated Chapter 11 reorganization. The arrangement could represent a model, or a deterrent, for any other strapped companies considering seeking government help.

Bankruptcy protection has worked before to turn debt-saddled companies in the steel, airline and retail industries into leaner and meaner successes. But a frozen credit market and the rigors of a Chapter 11 reorganization make it a difficult option for struggling companies and an unpalatable solution for many lawmakers.

For now, the talk has centered on Detroit's beleaguered automakers.

Company executives have spent the last two days fruitlessly pleading their case in Congress for at least a $25 billion bridge loan to pull them out of a near-death spiral. To a man, the Big Three executives rejected the idea of filing for bankruptcy even as some lawmakers began to warm to the concept.

Late Wednesday, the Senate canceled a showdown vote on an auto bailout package. But the idea of linking future aid to an accelerated bankruptcy protection plan did not die with it.

"I'm very much attracted to the prepackaged bankruptcy idea," said Senate Banking Committee chairman Christopher Dodd, D-Conn., who held hearings Tuesday on a bailout. He was referring to a method of seeking Chapter 11 protection whereby a company would negotiate plans with creditors before filing for bankruptcy, thus speeding up the process.

Simply put, a Chapter 11 bankruptcy lets a company stay alive by paying off creditors over time, retaining control of its assets and reorganizing. In the process, they raise capital, downsize and renegotiate contracts to stay alive.

It's what United Airlines did in 2002. The company filed for Chapter 11, shrank its fleet, cut 26,000 jobs and reduced wages for the rest of its work force. In 2006, it successfully emerged from bankruptcy protection.

But the current financial crisis has changed the bankruptcy terrain. With the credit markets frozen, companies would not find easy access to financing. That's why, even as some lawmakers insist that General Motors file for bankruptcy, they acknowledge that federal aid should be part of the package.

New York bankruptcy lawyer Mark Bane recommends that government assistance would serve best during the prepackaging process, leveraging the company's negotiations by setting an expiration deadline on the aid.

Still, bankruptcy is tough medicine. While creditors, suppliers and management take a hit, so do a Chapter 11 company's workers. Besides cutting jobs, pay and benefits, United Airlines also eliminated its pension plans.

Labor unions wince at the idea. Testifying before Congress last year, AFL-CIO Treasurer Richard Trumka decried a bankruptcy system that he said "has become effectively a device for the wholesale transfer of wealth from workers to other creditors."

When Dodd asked United Auto Workers President Ron Gettelfinger this week whether prepackaged bankruptcy backed up with federal guarantees was any more palatable, Gettelfinger cited risks to pensions and to retirees who could lose health benefits and are not yet eligible for Medicare.

What's more, auto executives argued that the stigma of bankruptcy would drive customers away, eliminating a Chapter 11 company's share of the market.

With an auto bailout dead for now, the bankruptcy debate is likely to rear up again next year.

President-elect Barack Obama had urged the Bush administration and Congress to find a way to help General Motors Corp., Chrysler LLC and the Ford Motor Co. In an interview with CBS' "60 Minutes" that aired Sunday, he indicated that bankruptcy may not be the answer.

"What we have to do is to recognize that these are extraordinary circumstances," he said. "Banks aren't lending as it is. They're not even lending to businesses that are doing well, much less businesses that are doing poorly. And in that circumstance, the usual options may not be available."

Robert Reich, who was Labor Secretary under President Bill Clinton and is now on Obama's board of economic advisers, has suggested that a company receiving federal aid at least pay a price similar to Chapter 11.

"In exchange for government aid," he wrote in his blog last week, "the Big Three's creditors, shareholders and executives should be required to accept losses as large as they'd endure under Chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts."

Associated Press writer John Dunbar contributed to this report.

Copyright 2008 Associated Press