"The sheer unexpected drop in revenue led to the inability to finance the social plan that was agreed with labour representatives," said the company, which had revenue of 1.3 billion euros (US$1.72 billion) last year.
Karmann presented a restructuring plan in September 2008, but deteriorating finances made the Osnabrueck-based firm unable to pay for a wave of 2240 layoffs, half of Karmann's 4460 German workers.
Most famous for the 1950s VW Beetle-based coupe dubbed the Karmann Ghia, the company also developed the retractable hardtop roof first introduced with the Mercedes-Benz SLK before the idea was later copied by competitors, finding widespread use in popular volume models like the Peugeot 207CC.
In recent years, a trend an among auto makers such as Volkswagen and Daimler to reduce outsourcing the assembly of cars to third-party firms, made it more difficult for Karmann to win new contracts. The trend has already crippled rivals such as Heuliez, Carozzeria Bertone, and Pininfarina.
The last Audi A4 cabrio left the assembly line at the end of February and Karmann's only remaining production contract, to build Daimler's Mercedes-Benz CLK cabrio, is set to end in mid-May.
Magna Steyr remains the only contract carmaker to receive significant new business, poaching last June the Porsche Boxster contract from Metso's Valmet.
"Together with the court-appointed insolvency administrator, the goal will be to lead the newly structured Karmann corporate group into a secure future and save as many jobs as possible," Karmann said in a statement.
A spokesman explained that operations would continue just as before since the company had virtually no bank debt, rather Karmann was forced to file for insolvency under German law since it could not pay for the massive layoff plan.
Cabrio roof-top and door hinge supplier Edscha with revenue of nearly 1.1 billion euros had filed for insolvency at the beginning of February, until now the biggest German auto company to fail since Lehman's bankruptcy triggered a violent collapse in auto demand in the fourth quarter of last year.