Reformers Eye Distressed-Debt Investors: Do hedge funds and other buyers of the securities of failed companies adversely affect the bankruptcy process?

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The American Bankruptcy Institute’s commission studying reforms of the U.S. bankruptcy code has distressed-debt investors near the top of its agenda. But so far the institute's not getting much backing from the bankruptcy lawyers and academics appearing at its meetings on the issue.

The ABI, a nonpartisan trade organization for lawyers and turnaround specialists, formed a commission around bankruptcy reform earlier this year. The commission’s mission statement says the growth of distressed-debt markets has lessened the effectiveness of the 34-year-old U.S. bankruptcy code. But experts appearing at two field hearings ABI held in October disagreed, contending that the buyers of high-risk assets bring hefty value to the process, and that without them some companies would never exit Chapter 11.

There seems to be little disagreement that the 1978 Bankruptcy Code is simply outdated. As Robert J. Keach, co-chair of the commission and a partner at Bernstein Shur, said in his opening remarks at the field hearing in San Diego, “the way both courts and commentators discuss the purpose of Chapter 11 has changed.”

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