This paper presents a model of a financially distressed firm with both bank debt and public debt. The model highlights the coordination problems among public debtholders that lead to investment inefficiencies in the workout process. The authors show that Chapter 11 reorganization law increases investment and characterizes the types of corporate financial structures for which this increased investment enhances efficiency. The paper discusses the effects of debt priority and maturity structure on investment, and relaxes the unrealistic assumption that public debt cannot be restructured. It also analyzes the impact of exchange offers on public debt restructurings and the role of bankruptcy law in affecting investment decisions. The authors conclude that Chapter 11 reorganization law can increase efficiency by extending debt maturity, overcoming free-rider problems in exchange offers, and maintaining equity value.This paper presents a model of a financially distressed firm with both bank debt and public debt. The model highlights the coordination problems among public debtholders that lead to investment inefficiencies in the workout process. The authors show that Chapter 11 reorganization law increases investment and characterizes the types of corporate financial structures for which this increased investment enhances efficiency. The paper discusses the effects of debt priority and maturity structure on investment, and relaxes the unrealistic assumption that public debt cannot be restructured. It also analyzes the impact of exchange offers on public debt restructurings and the role of bankruptcy law in affecting investment decisions. The authors conclude that Chapter 11 reorganization law can increase efficiency by extending debt maturity, overcoming free-rider problems in exchange offers, and maintaining equity value.