This study aimed to test the theoretical models of Chemmanur and Fulghieri (1994) and Diamond (1994) by examining the effects of financial distress on firms' debt choice, focusing on firms that newly raised debt during the financial crisis period (1998–2000). Contrary to the theoretical predictions of Chemmanur and Fulghieri, firms with higher interest coverage ratios (i.e., lower probability of financial distress) chose bank debt over public debt, and this tendency was more pronounced among firms that were more dependent on bank debt. This implies that as banks themselves faced financial difficulties due to the financial crisis, overall bank lending contracted, and consequently, firms with closer lending relationships with banks incurred higher costs in raising bank debt. On the other hand, firms that entered corporate restructuring due to severe financial distress, or firms with low correlation between cash flow conditions and investment opportunities (i.e., firms in financial distress but possessing good investment opportunities), showed higher probabilities of choosing bank debt. This supports Diamond's argument that differences exist in the monitoring roles of bank debt versus public debt. However, marginal tax rates did not have a significant effect on debt choice. These results suggest that while financial distress becomes an important factor influencing firms' debt choice due to the impact of the financial crisis, when banks are exposed to severe external shocks such as a financial crisis, their incentive to reduce their own distressed assets increases, thereby limiting the benefits of debt renegotiation associated with bank debt.