Abstract: This paper studies the trade-offs in reorganization bankruptcy (e.g. Chapter 11 of the US Bankruptcy Code) between protecting workers from job displacement and reallocating resources to more productive firms. Using data from over 148,000 bankruptcy filings in France between 2008 and 2017, matched with administrative employer-employee panel data, we document the costs of delayed reallocation by showing that most firms undergoing reorganization have experienced permanent productivity shocks, with a majority eventually facing liquidation. On the other hand, we document the insurance benefits of reorganization by comparing worker outcomes in firms that experience liquidation versus those that reorganize. We find that reorganization significantly reduces long-run earnings losses. We develop a model that captures the optimal allocation of reorganization and liquidation by bankruptcy courts under imperfect information, as they struggle to distinguish between temporary and permanent shocks when firms file for bankruptcy. Reorganization allows extended observation periods, enabling courts to better assess firm viability. This framework highlights the benefits of reorganization during periods of aggregate uncertainty, such as the Covid-19 pandemic. Optimal bankruptcy procedures balance resource reallocation, worker protection, and informational advantages.