Magellan Health Services Inc., the nation's largest provider of mental health care, said yesterday that it may file for Chapter 11 bankruptcy reorganization to substantially reduce its $1 billion in debt.

The Columbia-based company may seek bankruptcy protection if it is not given more time to repay its creditors, according to its annual report, filed yesterday with the Securities and Exchange Commission. Today marks the end of the extension that Magellan's bank lenders gave it this month to avoid default of its loan agreements.

"If the January waiver is not extended beyond January 15, 2003, the company may need to seek protection under the U.S. Bankruptcy Code," Magellan said in its SEC filing.

Magellan spokeswoman Erin S. Somers said it is still possible that lenders will grant the company another extension on its debt payment. "We expect to get additional waivers as we need them," Somers said.

In a statement yesterday, Magellan said a voluntary Chapter 11 filing is the "most effective and expeditious means" to alleviate its debt load and keep operating. In the event of bankruptcy, the company said it would still make timely payments without effect to its physicians, customers and employees.

"This restructuring alternative contemplates that all of Magellan's operations would continue as usual during the restructuring process," the company said.

Shareholders in the company would have their holdings wiped out under such a restructuring, with the company's creditors gaining most of the equity in Magellan. Magellan's largest shareholder is David Bonderman's Texas Pacific Group, which owns about 15 percent.

Magellan's debt was the result of several years of borrowing to fund acquisitions that made it the country's largest provider of mental health care.

The company recently hired New York investment banking firm Gleacher Partners LLC to help it find ways to lower its debt. Magellan also formed an ad hoc committee of major company investors.

Magellan officials have given a draft restructuring plan to the company's bank lenders and bondholders to reduce the $1 billion debt by "somewhat less than" $625 million. Magellan has proposed exchanging its $625 million of subordinated debt for company equity. Magellan officials said that neither the company nor other involved parties have approved the debt-reduction plan.

Magellan shares closed yesterday at 17 cents, down 2.9 percent, in over-the-counter trading.

Analysts have predicted for months that Magellan would file for Chapter 11. Thomas H. Shinkle Jr., a debt analyst with Imperial Capital LLC of Beverly Hills, Calif., said Magellan's already languishing share price will be further diluted for shareholders under the restructuring plan. Last fall, the company was delisted from the New York Stock Exchange because of its low trading price.

Shinkle predicted that the company's bondholders and lenders will agree to the plan as a cost-effective solution to Magellan's debt woes.

"In my opinion, this is a very fair solution to reduce debt," Shinkle said. "I predict all senior lenders will agree to it."

The company's proposed restructuring includes a multiyear extension of its contract with Aetna Inc., Magellan's largest customer in terms of members. Next month, Magellan is scheduled to pay Aetna $60 million as part of a long-term agreement. Aetna said last year that it expects to make a decision early this year on whether to extend its contract with Magellan, which expires Dec. 31, 2003.

Steven J. Shulman, Magellan's newly appointed chief executive, said in a statement that the company's restructuring would enable it to improve its business operations. Shulman, a managed-care veteran who led the recent turnaround of Prudential HealthCare, replaced Daniel S. Messina, who resigned in November after 13 months with the company.

"Once we complete the work we're doing to reduce our debt, not only will we have an improved capital structure, we'll also free up an enormous amount of management time, energy and attention that we can reinvest in managing our business," Shulman said.