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Chrysler LLC won court approval Wednesday for a key settlement in which former owner Daimler AG (DAI) will forgive nearly $2 billion in loans to the auto maker and pay $600 million into its pension plans.

Chrysler says the deal, which also calls for current owner, Cerberus Capital Management, to forgive a $500 million loan, is a critical element in its sale to a new company owned in part by Italy's Fiat SpA (FIATY).

The settlement wipes out debt and eliminates the possibility that the government's pension watchdog, the Pension Benefit Guaranty Corp., could terminate Chrysler's pension plans, which are underfunded by $10 billion, according to court documents.

Termination would give the PBGC a $9 billion claim against the company, interfere with the sale to Fiat and cause "significant disruptions" for Chrysler's workforce, Chrysler said.

Judge Arthur Gonzalez of the U.S. Bankruptcy Court in Manhattan approved the settlement at a court hearing Wednesday afternoon after Chrysler negotiated changes and resolved objections.

Daimler has agreed to forgive $1.5 billion under a second-lien credit agreement and a $400 million loan to a Chrysler unit. It will make the $600 million payment to the pension plans over a two-year period. In addition to the loan forgiveness, Daimler, Cerberus and Chrysler have agreed to drop certain claims against one another.

Separately, a court hearing on whether to shutter a quarter of Chrysler dealers was postponed to Thursday morning, a day later than scheduled. The parties will present evidence Thursday and possibly Friday. Oral arguments on the dealerships are set for Tuesday.

Jeffrey Ellman, a Chrysler lawyer, said in an interview that the hearing was postponed to accommodate the court's calendar. Stephen Lerner, an attorney representing some of Chrysler's dealers, cited "process reasons" for the delay but declined to elaborate.

Chrysler is looking to close 789 of its 3,200 dealers as part of its effort to sell the bulk of its assets. The affected dealers accounted for about 14% of Chrysler's sales last year.

The auto maker has said the move is necessary because its dealer network is too big and dealerships in some markets overlap. Chrysler also is focusing on putting its three brands under one roof, rather than having stand-alone Dodge, Chrysler or Jeep franchises.

Gonzalez approved Chrysler sale late Sunday, but a group of Indiana pension funds has appealed his order.

Under Chrysler's plan, Fiat would initially own 20% of the new company, though it would have the option of increasing its stake to as much as 51%. The United Auto Workers union would initially get a 55% stake, while the U.S. and Canada would own 8% and 2%, respectively.

The Indiana funds say Chrysler's plan upends the rights of senior lenders to be paid off before junior creditors. They also say the Treasury Department doesn't have the authority under the Troubled Asset Relief Program to finance Chrysler's restructuring.

Oral arguments before the 2nd U.S. Circuit Court of Appeals in New York are set for Friday afternoon.

"We are pleased that the Court of Appeals in setting this schedule and has recognized the sense of urgency Chrysler has to preserve and protect its going concern value," Chrysler said in a statement Wednesday. "We look forward to an expeditious conclusion to this matter and to getting back to building vehicles."

In Washington on Wednesday afternoon, General Motors Corp. (GMGMQ) Chief Executive Fritz Henderson and Chrysler LLC President Jim Press defended their companies' plans to shut down dealers. GM plans to close about 2,600 dealers.

The hearing was called by U.S. Sen. John Rockefeller, D-W.Va., chairman of the Senate Commerce, Science and Transportation Committee, who has voiced concern about the auto companies' plans to drastically reduce their dealer networks.

The hearing comes amid a major lobbying campaign by dealers on Capitol Hill to pressure lawmakers to rein in the plans.

-By David McLaughlin and Chad Bray, Dow Jones Newswires; 212-416-2018; david.mclaughlin@dowjones.com;

(Jeff Bennett in Detroit and Josh Mitchell in Washington contributed to this report.)