Washington Mutual Inc could be out of bankruptcy in March after reworking its recently rejected plan of reorganization, the attorney overseeing the company's bankruptcy said on Tuesday.

Our goal is to go effective in March, said Brian Rosen, an attorney from law firm Weil, Gotshal & Manges LLP representing Washington Mutual.

Once the company's reorganization plan is approved and goes into effect, it will begin distributing more than $7 billion to creditors. Those creditors range from hedge funds that hold the company's securities including Centerbridge Partners LP to vendors such as phone companies and software providers.

Delaware Bankruptcy Judge Mary Walrath rejected Washington Mutual's plan of reorganization on January 7. But at the same time she did approve a legal settlement it had proposed, giving the company a major victory.

The company's settlement plan divided about $10 billion in disputed assets between Washington Mutual, the Federal Deposit Insurance Corp and JPMorgan Chase & Co .

Seattle-based Washington Mutual has been in bankruptcy since September 2008 after its savings and loan was seized by regulators in the biggest bank failure in U.S. history.

The seized bank was sold by the FDIC to JPMorgan for $1.88 billion, setting off 18 months of legal battles that were resolved with the settlement plan.

Walrath rejected the reorganization in part because of various provisions that protected certain parties from being sued.

Washington Mutual filed a proposal on Tuesday to resolve Walrath's criticisms. Many proposed changes involved amending the wording of the plan, but some proposals will be more time consuming, such as soliciting some creditors again over the granting of releases from lawsuits.

When we did the solicitation in the first instance it was about three weeks, so that's what we're looking at, said Rosen. Washington Mutual would first need Walrath's approval before it could solicit creditors.

Shareholders, who will likely get very little from the company's reorganization plan that will pay nearly all creditors in full, have been among the most vocal opponents of the company's effort to get out of bankruptcy.

The official committee of shareholders asked the court on Tuesday for permission to seek documents and take depositions from a group of hedge funds which supported the company's reorganization plan.

The shareholders asked to investigate an allegation of insider trading made by an individual investor, Nate Thoma, during the company's confirmation hearings. Thoma said that Owl Creek Asset Management LP, Appaloosa Management LP, Centerbridge Partners LP and Aurelius Capital Management had used non-public information to trade Washington Mutual securities.

An attorney for shareholders did not return a call for comment.

An attorney for the four hedge funds declined to comment.

The company will update Walrath on its plans to rework its reorganization at a court hearing on Thursday. Shareholders have asked the court to hear their request to investigate the hedge funds at the same hearing.

Shares of Washington Mutual were down 4.8 percent in late pink sheet trading at 5.6 cents each.

The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delawre, No. 08-12229.

(Editing by Carol Bishopric)