The US president said a further $60 billion ((£18.3 billion) would be pumped into the ailing car giant in return for the government taking a 60 per cent stake in the company.
However, he stressed that the US government has no interest in using its right as a shareholder to try and run the company.
"What I am not doing, what I have no interest in doing, is running GM," he said.
Obama was positive about the future and said the plan to rescue the firm was “full of promise”.
However the process would not be easy, he warned, predicting "a painful toll on many Americans".
He told reporters he did not want to simply give the company more debt or let it survive on taxpayer’s money.
The court protection would be used to create "Old GM", with all the "bad" assets like defunct car plants - and "New GM", which will own the "good" assets, such as viable factories and brands like Chevrolet and Cadillac, he added.
"I am absolutely confident that if well managed, a new GM will emerge that ... can out-compete automakers around the world and that can once again be an integral part of America's economic future," said the president.
It is expected that GM may be able to exit bankruptcy protection in between 60 and 90 days.
GM CEO Fritz Henderson said the new car maker will be leaner and more focused than before. Steps to relaunch the brand will be "extraordinarily difficult", he warned, including further plant closures, although warranties and service products would be honoured.
"To those of you who have never tried a GM vehicle, or who have tried one and given up on us, we look forward to the chance to win your business and earn back your trust," he added. "The GM that many of you knew, the GM that in fact had let too many of you down, is history."