This paper shows, based on firm-level data, that by the time of the 1997–98 crisis, Korea's corporate sector, particularly chaebols, became highly vulnerable to bankruptcy. Evidence is presented showing that between the late 1980s and 1997 the debt servicing capacity of Korea's corporate sector was on a decreasing trend due to both deteriorating profit performance and a rising debt leverage. What accounted for the declining profitability in Korea's entire corporate sector? It is argued that the declining profitability was due to rising labor costs in Korea and increasing competition from abundant, developing countries such as China. We also provide evidences that the chaebols with ownership of non-bank financial institutions (NBFIs) had systemically higher debt leverage than the firms without any ownership in NBFIs. This paper moves to assess the interim progress of corporate restructuring since the onset of the crisis. First, the financial vulnerabilities of chaebols have improved significantly during the post-crisis period. Indeed, all indicators show that chaebols consistently out-performed non-chaebol companies following the crisis. In particular, chaebols were able to rapidly reduce their debts. Furthermore, although non-chaebols reduced their debt but at a lower extent, there were no signs of improvement in profitability. Second, the transition matrix based on interest payment coverage ratios shows that a high proportion of firms in the bottom quintile moved up to the upper quintiles, implying that the financially vulnerable firms are able to move up rather than being stuck with poor performance. Third, despite the considerable progress made in corporate restructuring, there remained quite a small number of impaired firms as of 2002; in that year, 25.2 percent of the sample firms are not able to even cover interest payments, let alone the principle, with earnings. Also, in the 2000–2002 period, there were 550 firms suffering similar conditions for three consecutive years. The number of financially weak firms clearly indicates that there still remains the need for further corporate restructuring. Finally, from our study it is reasonable to suggest that rehabilitation proceedings in Korea have made considerable improvements as a result of reform measures implemented following the crisis. The following reforms have worked to enhance rehabilitation procedures, including the introduction of an economic efficiency criterion for the selection of firms for corporate organization, shortened periods for proceedings, the improvement in the due diligence process, and preventing large firms with complex capital structures in entering composition. With all of these measures in place following the crisis, our study shows that the firms in the 1998 cohorts that entered both corporate reorganization and composition out-performed those in the respective cohort in 1997. Though it may be premature to make a definitive assessment, empirical tests suggest that the relatively poor performance of the firms in the workout may be attributed to a slower rate of debt reduction. This may be as a result of the slow progress in devising restructuring plans in the absence of a legal enforceability in workout programs.