NEW YORK CITY-Residential mortgage bond insurer Ambac Financial Group said late Monday it had filed for Chapter 11 protection after being unable to raise additional capital. In its filing at US Bankruptcy Court in Manhattan, the locally based Ambac listed assets of $394.5 million and liabilities of $1.68 billion as of June 30, with Bank of New York Mellon as its largest creditor and the Vanguard Group as its largest shareholder.

In a related filing, Ambac on Tuesday brought an adversary lawsuit against the Internal Revenue Service to shield a $700-million tax refund. A spokeswoman for the IRS says the agency does not comment on lawsuits.

The lawsuit against the IRS aims to protect the refund, which it received on back losses that resulted from its credit default swap contracts, from seizure by the agency following an Oct. 28 document request seeking information about Ambac’s accounting methods. The document request raised the possibility of the refund being taken back. “AFG’s ability to reorganize successfully will be jeopardized or destroyed” if the IRS seizes the refund, according to the lawsuit.

In connection with the bankruptcy filing, Ambac is seeking an interim order that would restrict certain transfers of equity interests in and claims against the company, retroactive to the date of the filing. The purpose of the interim order would be to preserve Ambac’s net operating losses, which totaled approximately $7 billion through the first half of this year.

In a release, Ambac says that along with being unable to stave off a bankruptcy filing by raising additional capital, it was also unable to agree to terms with senior debt holders on a prepackaged bankruptcy proceeding. However, the release states that creditors had agreed to” a non-binding term sheet that will serve as a basis for further negotiations with the ad-hoc committee and that may allow the company to emerge from bankruptcy more expeditiously.”