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I will attempt to answer
I will attempt to answer your question(s). The parts of the brain that, before the injury, controlled movement of a limb will still fire off signals to the axon that goes down the spine. The problem is that the axon chain doesn't go all the way to the target muscle anymore. So, the signal can be generated. It just doesn't do anything. Now, the sensory neurons also still work, but whatever signal they may generate doesn't reach the brain. It stops in the spinal cord somewhere. On the other side of the lesion there is still a piece of that sensory circuit that used to carry signals to the brain. If that piece is enervated (activated), the brain will feel something. Whether that something is movement or pain touch depends on the signal. Generally, since the signal is spurious and uncontrolled, the sensation felt is generally that of pain, but whether the pain is burning or pulsing or constant or simply an itch, again, depends on the signal. This is the subject of intense research at the moment, since so many SCI victims suffer from phantom pain. There are several ways to mitigate this pain, any one of which may be employed: various drugs or combinations of drugs, TENS units, acupuncture, hypnosis, yoga.
I have not read anything about the “signal generating or receiving areas” of the brain being taken over by other functions once movement or sensation is no longer viable. However, other parts of the body may generate a sensory signal that is felt by the brain as coming from a limb that no longer can pass a signal to the brain.
You should also be aware that the muscles that can no longer be controlled may, in and of themselves, seem to “get bored” waiting for a signal . . . and initiate movement on their own. This is called spasticity. While in rehab I heard the story of one “partial quad” who could use these movements to enable a rudimentary form of walking. He could predict what movements in his upper body would generate a particular spasm. So, by making certain movements, he could cause hip and leg flexors to activate predictably. I, myself, can predict spasms, but none of them produce any useful movement. They only hinder the actions I wish to initiate.
Now, about the chip implant: First, the chip doesn’t need to send a signal to the brain. The motor cortex initiates the signal and sends it down the neuron – or in this case to the chip, which then sends it to the computer. If the signal were sent to the nerve below the injury level that activates the actual muscle instead of the avatar on the screen, we would have an “outside the spinal cord” cure for paralysis. There have been a couple of sci-fi movies or TV shows based on this concept.
Recently, the American who volunteered to have a micro-circuit implanted in his head a couple of years ago is now having a number of rejection-related problems. For this and a number of other reasons the thrust of the research today is focused on finding ways to have the damaged nerves regrow across the lesion. The mitigating factors are being identified and the problems are being solved step by step. The Spinal Cord Society has found a viable method of “dissolving” the scar tissue that filled the injury site, or introducing a substrate to support a mix of cells that will regenerate nerve cells while preventing the enzymes that block regrowth from activating. The SCS reported just this month that their newest attempt resulted in a good degree of recovery in the population of lab rats used.
Repairing the internal sets of cables is a much better option than trying to do it externally. The question still exists, though, as to whether once the connections are made, will the axon that once controlled the big toe reconnect to the appropriate axon below the injury site . . . or will the person have to relearn movement, e.g. use the signal that used to extend the right leg to move the left big toe?
I hope this doesn't come across as "too much information."