Fears that a major U.S. automaker could seek bankruptcy protection are causing auto parts suppliers to demand quicker payments from the manufacturers, exacerbating problems for the already hard-pressed car makers.

General Motors Corp and Chrysler LLC are racing to restructure their money-losing operations and GM has warned there is a rising chance it could file for bankruptcy by June.

The uncertainty is rattling auto parts suppliers since once a company files for bankruptcy, many vendors are considered unsecured creditors who may or may not be paid what they are owed. To protect them from such an event, some suppliers are rushing to protect themselves, said restructuring advisers and attorneys.

Many suppliers are sending letters to the auto manufacturers saying 'We deem ourselves to be insecure and you need to provide adequate assurance that you're going to pay us ... and if you don't, we reserve the right to stop shipping you,' said Roger Frankel, head of the restructuring group at law firm Orrick, Herrington & Sutcliffe LLP, who is advising auto suppliers.

The Uniform Commercial Code, which helps govern commercial transactions, allows suppliers to demand assurance of payment if it appears their customers will have trouble coming up with the cash to pay them.

Assurances currently being demanded by auto suppliers include cash-on-delivery requirements, or shortening payment terms to 10 to 30 days, said Frankel.

Those negotiations are going on up and down the supply chain in automotive right now, said a source familiar with the negotiations between the automakers and their suppliers.

Faster payment terms can be challenging for a company that is already struggling to pay its bills. But the consequences of not meeting vendor demands can be even more serious.

One supplier not wanting to continue (shipping) products that are mission critical, and with no alternative vendor stepping up, well, that one little supplier could shake everything, said Jerry Mozian, national segment leader of restructuring for executive services firm Tatum LLC.

Chrysler said on Wednesday it was forced to idle its minivan plant in Windsor, Ontario, because of a parts shortage and warned that the issue, if unresolved, could disrupt production at its other North American plants.

The reason for the parts shortage was not immediately clear and Chrysler, controlled by Cerberus Capital Management, declined comment.

It's a very delicate issue, said Frankel. The automakers need the suppliers but on the other hand, they don't have enough cash to start paying COD for everything. And the auto suppliers obviously don't want to put them into bankruptcy.

If an automaker does file for Chapter 11, it will probably ask the court to consider some vendors critical, meaning those vendors would continue getting paid. This can provide some assurance to suppliers. However, not all vendors will be given this coveted critical vendor status.

There's been a run on the bank from some suppliers, said a source familiar with the U.S. automaker's operations.

Auto parts suppliers do not want to break contracts since they rely on the automakers' business, but they do want to protect themselves in the case of disruption caused by a potential bankruptcy, the source said.

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