NEW YORK, Oct. 5 (Reuters)—A federal judge has given AmbacFinancial Group her approval to send its bankruptcy exit plan tocreditors for a vote.

Judge Shelley Chapman approved the plan's outline on Wednesdayin U.S. bankruptcy court in Manhattan, clearing a key hurdle inAmbac's path toward crawling out of bankruptcy.

The plan would pay secured claimants in full, but would likelywipe out equity holders. Creditors have until Nov. 23 to vote onthe plan. If they approve it, it would return to the judge for aconfirmation hearing on Dec. 8.

The latest version of the plan reflects a major settlement withWisconsin's insurance regulator, without which Ambac may have beenforced to liquidate. The settlement resolves tax andexpense-related disputes involving the company's Ambac AssuranceCorp operating unit.

The unit will make a $30 million up-front payment for AmbacFinancial's benefit and pay $5 million per year to cover some AmbacFinancial's operating expenses.

General unsecured claimholders would recover 8.5 cents to 13.2cents on the dollar, while holders of $1.25 billion of senior noteswould get between 11.4 cents and 17.6 cents on the dollar. Thosegroups, along with holders of $444.2 million in subordinated notes,could also stand to receive stock and warrants.

Once the world's second-largest bond insurer, Ambac filed forChapter 11 bankruptcy last November, burdened by large losses afterit strayed in the prior decade from insuring municipal bonds andbegan guaranteeing bonds backed by risky mortgages.

The Wisconsin regulator in September said the restructuring planallows Ambac to focus on rehabilitating a segregated accountcreated to hold some of Ambac's riskiest mortgage obligations. Thepolicies in the account had $40.5 billion of exposure as of June30, Ambac said.

Still unresolved is Ambac's dispute with the U.S. InternalRevenue Service over the company's tax accounting practices relatedto credit default swap contracts.

That dispute must be resolved for the restructuring plan to takeeffect, Ambac said in a statement last month when it unveiled theplan.

The parties will try to negotiate a resolution next week, saidPeter Ivanick, an attorney for Ambac, on Wednesday.

Ambac was not the only insurer hurt by the financial crisis.MBIA Inc., a larger Armonk, New York-based rival that sufferedsimilar losses, but did not go bankrupt, was restructured by NewYork's insurance commissioner in 2009.

The Ambac case is In re Ambac Financial Group Inc, U.S.Bankruptcy Court, Southern District of New York, No. 10-15973.