One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said.

*****

Under the bankruptcy plan, senior bondholders would trade their current debt for new debt maturing later worth about 70 cents on the dollar. They would get 92.5% of the equity in a restructured CIT. Junior bondholders would get the remaining equity in a reorganized CIT, but no new debt.

CIT has agreed to accept $1 billion in backup financing from Mr. Icahn, which it would tap if it needs more than $4.5 billion it recently received from other bondholders, these people said. CIT stock was halted on the news.

As part of further discussions with CIT, Mr. Icahn has agreed to back down while the company restructures in bankruptcy court. CIT launched a debt-exchange offer about a month ago while also asking bondholders to vote on a prepackaged bankruptcy plan. The results of CIT's debt-exchange offer have not yet been finalized, but people close the company said it had likely failed. Meanwhile, the company had cleared significant hurdles that would give it more support than it needs for its prepackaged bankruptcy plan, a person familiar with the matter said.

The company plans to file for bankruptcy in New York as soon as Sunday night or early Monday, said people familiar with the matter. CIT is poised to enter bankruptcy with enough creditor support to approve its reorganization plan and shorten its stay in Chapter 11, these people said.

CIT and Mr. Icahn declined to comment. The deal comes as Mr. Icahn has so far failed to persuade bondholders to block CIT's restructuring plan, these people said. The billionaire investor tried to derail CIT's restructuring plan by offering bondholders 60 cents on the dollar to vote down the lender's debt-exchange offer and prepackaged bankruptcy plan.

In a letter to CIT's board, Icahn said the loan would save the company $150 million in fees to prospective lenders, and would not force bondholders to vote for a revised debt exchange. Icahn in his letter criticized the proposed $6 billion in a secured term loan being offered by the company as a "bad-faith attempt to buy votes for the company’s exchange offer/plan of reorganization, since all prospective lenders must vote their CIT debt in favor of the company's plan in order to receive an allocation of the new loan." He also chastised the proposed prepackaged bankruptcy plan because it would give the board "releases against certain claims that shareholders and bondholders would have against them."

CIT in response said on Monday that it intends to "ask Mr. Icahn for more information regarding his proposal." The lender to small businesses and middle-market companies added that, while it has developed a restructuring plan in consultation with a steering committee of CIT lenders, it “remains open to securing financing on the most beneficial terms.”

Michael A. Gallo Jr., head of the finance group at the law firm DeCotiis, FitzPatrick, Cole & Wisler, noted Icahn’s offer fails to address the restructuring plan. "The whole purpose of the restructuring is to exchange some of the debt for equity so CIT wouldn’t have to repay it. If you're trading one loan for another, you’re not accomplishing [any restructuring], just pushing off the [debt] obligation to another time," Gallo said.

The changes were announced in a statement released about 40 minutes before the midnight deadline. The amendments have been approved by CIT's Board of Directors and the bondholder steering committee.

The aim of the debt exchange, announced Oct. 1, is to get holders of about $31 billion in bonds to cut this debt by at least $5.7 billion and to extend the debt maturities. At the same time, CIT is asking bondholders to vote on a prepackaged bankruptcy plan.

Under the exchange, owners of CIT's bonds would get new secured debt worth as much as 90 cents on the dollar if they currently own bonds that mature this year, but would end up with less new debt and more equity if they own bonds maturing later.

The amended terms of the restructuring plan include, among others: a comprehensive cash sweep mechanism to accelerate the repayment of the new notes; the shortening of maturities by six months for all new notes and junior credit facilities; an increased amount of equity offered to subordinated debt holders reflecting agreements with holders of the majority of its senior and subordinated debt; the inclusion of the notes maturing after 2018 that had previously not been solicited as part of the exchange offer or plan of reorganization; an increase in the coupon on Series B Notes, to 9% from 7%, being issued by CIT Delaware Funding; and provided preferred stock holders contingent value rights in the plan of reorganization, and modified the allocation of common stock in the recapitalization after the exchange offers, as part of an agreement with the United States Department of Treasury.

Peek joined CIT in 2003 after being denied the top job at Merrill Lynch & Co. The New York-based commercial lender lost $5 billion in the last nine quarters as the collapse of the market for subprime mortgages sparked the worst financial crisis since the Great Depression and cut off CIT's short-term funding.

CIT has asked bondholders to exchange unsecured obligations for new secured debt maturing in four to eight years and preferred shares. Bond and credit-default-swap prices show that investors are speculating the offer to exchange about $29 billion of debt won't prevent the company from filing for bankruptcy.

CIT, which finances about 1 million businesses from Dunkin' Brands Inc. to Eddie Bauer Holdings Inc., will seek court protection through a pre-packaged bankruptcy should the debt exchange fail, according to an Oct. 1 filing. The company posted a second-quarter loss of $1.62 billion as more customers defaulted on loans.

The 101-year-old lender accounts for about 60 percent of fashion's factoring volume and lent the apparel industry about $4 billion last year, according to estimates.

"We believe this plan maximizes franchise value and can be executed quickly and effectively through a series of voluntary debt exchange offers or an expedited in-court restructuring process," said Jeffrey Peek, chairman and chief executive officer. "Upon completion of either alternative, CIT will be a well-funded bank holding company with a strong capital position and market leading franchises."

The group's profitable factoring business, Trade Finance, on Friday got a boost when $1 billion was earmarked to fund the operation, a move aimed at proving to vendors that CIT has the money to fund clients' needs. One source said that of the $3 billion loan facility provided by a group of CIT's major bondholders, $2 billion was made available on July 20 and the final $1 billion was made available on Friday. The parent in turn is earmarking $1 billion for its factoring arm.

In a letter to clients, John Daly, president of Trade Finance, wrote that "CIT Trade Finance is one of the nation's oldest providers of factoring and financing services. The companies that have placed their confidence in us — our clients — range from family-owned and -operated manufacturers to global publicly traded corporations. ...To demonstrate our parent company's commitment to support CIT Trade Finance and our clients, CIT Group Inc. has provided $1 billion of the proceeds from its recently announced financing to CIT Trade Finance. These funds are in addition to other available funding. We believe we have sufficient liquidity to meet our obligations and our clients' needs while our parent company implements its restructuring plan."

CIT Trade Finance "remains open for business. We are actively reaching out to and working with our clients to ensure they continue to access our services needed to run their business. Credit is being checked, invoices are being collected and funds are being remitted," Daly emphasized.

"This definitely relieves their customers' concerns that CIT doesn't have the cash to continue to support them. The factoring group is now able to pay on all of the collections and claims that come in as part of the normal course of business," said Gary Wassner, president of Hilldun Factors, who has been vocal on behalf of the Council of Fashion Designers of America about the need for federal government intervention to save CIT because of its importance to the fashion and retail industries.

A bankruptcy or a pullback in lending by CIT, which finances about 1 million businesses, threatens to permeate industries ranging from airplanes to clothing to software. Microsoft Corp. said yesterday it terminated a vendor financing agreement with CIT, and retailer Urban Outfitters Inc. estimates 7 percent of its vendors use CIT. Boeing Co. and Airbus SAS supply jets to CIT's aircraft-leasing unit.

*****

As part of a five-year contract with Microsoft, CIT provided financing for customers buying software, computers and services. Customers who already used CIT to pay for products will continue to get financing from the lender, Redmond, Washington-based Microsoft said yesterday in a statement.

Exxel CEO Kazazian, who has been able to pay his bills, said in an interview yesterday that CIT has restored about 70 percent of the financing it normally provides after last week telling the company it should borrow "the least amount you can live with." Exxel, which also makes tents and wetsuits, sells about 3 million sleeping bags a year, Kazazian said. The company and most of its suppliers rely on CIT for factoring, meaning they sell payments owed for goods to receive immediate funds. This short-term financing provides money to produce more orders. Retailers will typically make payments within 90 days, and the factor keeps a fee based on a percentage of the total order. Kazazian estimates it would take three to five months to move to another bank. "It's not that easy to flip a switch," he said. Kazazian said he is in talks with Wells Fargo & Co., the San Francisco- based bank that gained market share in small-business lending last quarter.

Many vendors who use CIT as a factor were clearly panicked. "I've had 26 calls from garment center companies since 12 p.m. yesterday," said bankruptcy attorney Jerry Reisman, a partner at Reisman, Peirez & Reisman. "It's going to have such a ripple effect that the government doesn't understand. Tomorrow, if it's payroll day, how will these manufacturers be able to obtain money for payroll?" Steven Kolb, executive director of the Council of Fashion Designers of America, said designers were concerned. "They don't really know where to turn when the government isn't going to bail out CIT," Kolb said. "There is a level of unfairness when you look at some other industries that have been bailed out."

Fitch Ratings said there was a "high probability" that CIT would file for bankruptcy soon and also cut the firm’s credit rating on $35 billion in debt to "C" from "BB-minus." Ultimately, it might be CIT's own clients who sink the company by drawing down their credit lines, in effect making a run on the bank and soaking up its reserves. "The company's already tenuous liquidity position has been further eroded as its customer base has likely been drawing down on its availability credit lines," Fitch analyst Vincent Arscott wrote in the downgrade.

The ramifications of a failure could be both subtle and dramatic. "A lot of easy money that helped this industry for a long time is not going to be around," said David Strasser, an equity analyst with Janney Montgomery Scott. "There's going to be a product that nobody's going to expect to be big....and they're not going to be able to get it out there."

The disclosure raised the possibility of a bankruptcy filing by the financial giant and left many vendors and retailers in limbo about how they'll finance their fall shipments and finance their businesses. "This is terribly upsetting," said Gary Wassner, president of Hilldun Factors. "This will upset the entire shipping season. It will be very disruptive. I am surprised that the government would not think about the thousands of people that would be affected. This also impacts so many people on the periphery [of the apparel industry]."

Hours before the 6 p.m. announcement from CIT, there was a flicker of optimism when trading was halted on the lender's stock in the final half hour of trading, with shares up 3 cents to $1.64. Considered a likely prelude to a major announcement just as President Obama was being briefed on the situation. Hope surrendered to fear just two hours later. The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. have been discussing whether to rescue CIT, which already received $2.33 billion in federal funds.

******

Kevin Burke, president and chief executive officer at the American Apparel & Footwear Association, said members of his board estimated CIT represents about 60 percent of factoring volume within the apparel industry. A failure "would be another nail in the coffin," he said. "It would be devastating. It would have a very strong impact on the industry's ability to get products to the consumer."