Hedge-fund manager Philip Falcone's LightSquared Inc. venture was preparing Sunday to file for bankruptcy protection after negotiations with lenders to avoid a potential debt default faltered, said people familiar with the matter.

LightSquared and its lenders still have until 5 p.m. Monday to reach a deal that would keep the wireless-networking company out of bankruptcy court, and there were some indications over the weekend that a final decision hadn't yet been reached on its fate. Still, the two sides remained far apart,...