Con sidering the ex istence of co rpo rate incom e tax, w e analyze the decision2m ak ing of co r2 po rate bank rup tcy and deb t reo rgan izat ion in a risk2neu t ral f ram ewo rk, w h ile co rpo rate defau lt is en2 dogenou sly determ ined by m ax im izing the value of equ ity claim s. W ith standard deb t con t ract and un2 der ab so lu te p rio rity ru le, th is u sually leads a levered f irm to be early o r lately liqu idated w ith lo ss of value. Bu t if the st rategic defau lt o r deviat ion f rom ab so lu te p rio rity ru le is allow ed, the decision that m ax im izes value of equ ity w ill be con sisten t w ith one that m ax im izes co rpo rate value. In th is paper, w e demon st rate that deb t reo rgan izat ion o r credito r’s concession essen t ially enhances them arket value of the deb t, as it enab les credito rs o r deb to rs to avo id ill2t im ed liqu idat ion.