The History of Bankruptcy

How Modern Restructuring Practice Took Shape

Modern American bankruptcy practice begins with the Bankruptcy Reform Act of 1978, which replaced the 1898 Bankruptcy Act and created the Chapter 7, Chapter 11, and Chapter 13 framework practitioners use today. The most consequential changes since then include BAPCPA in 2005, which introduced the means test and reshaped both consumer and corporate bankruptcy; the Supreme Court’s 2011 ruling in Stern v. Marshall, which limited the constitutional authority of bankruptcy judges; the HAVEN Act of 2019, which corrected a means test inequity affecting disabled veterans; and the rise of insider DIP lending, which has transformed who controls modern Chapter 11 cases. In this article, Ted Gavin, Managing Director and Founding Partner of Gavin/Solmonese and former President of the American Bankruptcy Institute, traces that history through the perspective of a practitioner who has worked through most of it.

Contents

• Bankruptcy Before 1978: A Brief Origin
• The 1978 Bankruptcy Code: A New Foundation
• The Rise of Chapter 11 as a Business Tool
• The Professionalization of the Restructuring Bar
• The 1990s and 2000s: Mega-Cases and the Modern Playbook
• BAPCPA: The Most Consequential Change in a Generation
• Stern v. Marshall and the Authority of Bankruptcy Courts
• The 2008 Financial Crisis and What It Taught the Practice
• The HAVEN Act: A Targeted Correction
• The Modern Era: Lender Control, Speed, and Strategic Filings
• The Constant Beneath the Changes: Negotiation Is the Work
• Frequently Asked Questions

Bankruptcy Before 1978: A Brief Origin

Bankruptcy is one of the oldest legal concepts in commerce. Tribal kings in Mesopotamia practiced debt forgiveness. The Torah describes debt relief every seven years and the return of collateral every fifty. The Greeks introduced creditor remedies. The Romans expanded them. After the fall of the Roman Empire, the merchant economies of medieval Italy gave the practice its name. When a trader failed to pay his debts, fellow merchants would come to his stall in the marketplace and break his bench. Banca rotta, broken bench, became the word that traveled into every European language as bankruptcy.

For most of the next 1,500 years, bankruptcy law was creditor-protective and debtor-punishing. English bankruptcy law, the most direct ancestor of American bankruptcy law, treated insolvency as a moral failing requiring remedies for the creditors who had been wronged. Discharge of debt as a debtor right did not exist. Imprisonment for debt was common.

The American break with that tradition began with the Constitution itself. Article I, Section 8 grants Congress the power to establish uniform laws on the subject of bankruptcies throughout the United States. Congress used that power reluctantly through most of the nineteenth century, passing and repealing short-lived bankruptcy acts in response to financial panics. The Bankruptcy Act of 1898 was the first permanent federal bankruptcy law and the foundation of American bankruptcy practice for the next eighty years. Around the time of the Civil War, the underlying philosophy of American bankruptcy began to shift from creditor protection toward rehabilitation. That shift defines what makes American bankruptcy law distinctive even today. The U.S. and some European countries have a rehabilitative bankruptcy scheme. Most other places have a creditor-centric scheme that makes liquidation compulsory for a company that may or may not be able to meet its debts. The American jurisprudential basis is different. It is okay to roll the dice if you are trying to roll the dice for the right reason.

The United States revised its bankruptcy laws roughly every forty years after the mid-1800s. The Chandler Act of 1938 reorganized the framework, creating predecessors to modern Chapter 11. By the 1970s, the system needed another overhaul.

That overhaul became the Bankruptcy Reform Act of 1978. This article begins there because that is where modern American bankruptcy practice begins.

The 1978 Bankruptcy Code: A New Foundation

The 1978 Code did not simply amend the Bankruptcy Act of 1898. It replaced it.

Prior to 1978, it was not the Bankruptcy Code. It was the Bankruptcy Act. There were no bankruptcy judges. They were bankruptcy referees, drawn from the bar that practiced before them, much as bankruptcy judges still are in many jurisdictions. The Code was a sea change in terms of what could be accomplished in bankruptcy. It had a different legal standing, and the way bankruptcy functioned changed.

The Code introduced several structural innovations that practitioners working today take for granted. Bankruptcy referees became bankruptcy judges. The chapters of the Code that organize today’s practice (Chapter 7 for liquidation, Chapter 11 for reorganization, Chapter 13 for individual repayment plans, and the more specialized chapters that followed) replaced the older patchwork of corporate and individual proceedings under the Act. The U.S. Trustee program was created as a uniform watchdog over the bankruptcy process, although two states declined to participate. There were senators from those states who did not want to give the Department of Justice that kind of power. Alabama and North Carolina use bankruptcy administrators instead of U.S. Trustees today. The function is largely identical.

The Code also formalized bankruptcy as a profession. Before 1978, bankruptcy work sat at the edges of the legal field. The white-shoe firms generally avoided it. After the Code, that changed. What had been a type of practice that “good firms” avoided, and that the white-shoe firms would not touch, became a high-profile and lucrative practice area. The Code made the difference.

One legacy of the pre-Code era persists in the demographic profile of the bankruptcy bar. The lawyers who built the practice during its less prestigious years included a higher proportion of minorities — women, Black lawyers, and Jewish lawyers than the corporate bar of the same period. The bankruptcy practice drew talent that the white-shoe firms of that era were not recruiting. That history shaped a practice area that, even now, looks different from many of the corporate practice areas around it.

The Rise of Chapter 11 as a Business Tool

The 1978 Code’s most consequential structural change for corporate practice was the creation of modern Chapter 11. Before 1978, business reorganizations operated under Chapter X (for corporate reorganizations) and Chapter XI (for smaller business arrangements) of the old Act. The 1978 Code consolidated these into a single Chapter 11 framework that gave debtors broader latitude to remain in possession of their assets, propose plans of reorganization, and use the bankruptcy process to restructure rather than simply liquidate.

In the years immediately following the Code’s enactment, that latitude produced a stream of cases that established the modern bankruptcy playbook. Large industrial debtors filed Chapter 11 not because they had run out of options but because Chapter 11 was now an option. Asbestos-related filings (Johns-Manville in 1982 and the wave that followed) demonstrated that Chapter 11 could be used to address mass tort liability through the channeling of claims into trusts. Financial restructurings in industries from steel to airlines to commodities to retail showed that the Code’s flexibility could be deployed strategically rather than only defensively.

By the late 1980s and into the 1990s, Chapter 11 had become a tool sophisticated debtors and their advisors used to accomplish specific business objectives, not merely a last resort. That shift was as significant for the practice as the legal changes that enabled it.

The Professionalization of the Restructuring Bar

The same period that established Chapter 11 as a strategic tool also established the modern restructuring profession. Before the Code, the work of advising distressed companies sat largely with a handful of specialized lawyers and a smaller number of financial advisors operating at the margins of larger firms. After the Code, the practice professionalized rapidly.

The financial advisor’s role evolved alongside the legal practice. The 1980s and 1990s saw the emergence of dedicated restructuring advisory firms and the formalization of fiduciary roles in bankruptcy proceedings. Court-appointed fiduciaries, examiners, trustees, plan administrators, and post-confirmation monitors became distinct professional categories with their own standards, their own credentials, and their own professional associations. The American Bankruptcy Institute, founded in 1982, and the Turnaround Management Association, founded in 1988, became the central professional organizations for the field.

The professionalization of the bar mattered because the Code’s flexibility required practitioners who understood not only the legal mechanics but the financial, operational, and negotiating dynamics of distressed situations. A Chapter 11 case under the Code is not a procedural matter. It is a multi-party negotiation conducted within a procedural framework. The advisors who learned to operate effectively in that environment built the practice that exists today.

The 1990s and 2000s: Mega-Cases and the Modern Playbook

The 1990s and 2000s produced cases that defined how Chapter 11 would be practiced for the next generation. Texaco’s 1987 filing, then the largest in history, demonstrated how a solvent company could use Chapter 11 to manage a massive litigation judgment. The retail bankruptcies of the late 1990s and early 2000s established the playbook for Chapter 11 in consumer-facing industries. Energy company restructurings in the wake of Enron’s collapse in 2001 reshaped how the field thought about complex corporate structures, off-balance-sheet liabilities, and the relationship between bankruptcy and securities fraud.

For me, the case that left the longest tail was Montgomery Ward. Our firm served as plan administrator in what was the largest retail liquidation in American history. That case still has tendrils out in the world when retailers liquidate. The mechanics were worked through in that case — claims administration, the disposition of leases and inventory, the resolution of priority disputes — became reference points for the retail cases that followed.

Airline bankruptcies became a recurring feature of the period. United, Delta, Northwest, US Airways, and others passed through Chapter 11 in the 2000s. The pattern was consistent enough that you came to recognize a typical airline case structure. When you have seen one airline bankruptcy, you have kind of seen them all. The lesson, repeated through Spirit Airlines’s 2024 filing and the cases that followed, is that airlines tend to be claim-heavy but asset-light in unusual ways. They rarely own their planes, leasing them from financiers and lessors. What they do own are gate leases and landing rights, which can be lucrative assets in their own right. One airline goes away, and every other airline benefits just a little bit by rushing in to fill the void.

The mega-case era also taught the field something it would carry into every subsequent restructuring. Chapter 11 was no longer a process driven primarily by the company in distress. It was a process driven by the relationships among multiple sophisticated parties, each with its own counsel, its own advisors, and its own theory of how to maximize its position. The plan that emerged from a large Chapter 11 case was rarely the plan the debtor would have written if it were drafting unilaterally. It was the plan that survived contact with the constituencies the Code requires the debtor to engage.

BAPCPA: The Most Consequential Change in a Generation

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known as BAPCPA, is the most consequential change to American bankruptcy practice in my career. Its impact ran through every chapter of the Code and reshaped the relationship between debtors and creditors in ways the field is still working through.

BAPCPA fundamentally changed how Chapter 7 is practiced. It fundamentally changed aspects of Chapter 11. It changed the landscape. Those who were around will remember the lines of consumer debtors stretching out the doors of bankruptcy courts on the eve of BAPCPA’s effective date. They were trying to get their cases filed before BAPCPA went into effect. It very much destabilized the landscape.

The name of the law signals its purpose. The “Abuse Prevention” framing reflected a specific legislative theory: that some portion of consumer Chapter 7 filings represented strategic abuse rather than genuine financial distress. To address that perceived abuse, BAPCPA introduced the means test, a calculation that determines whether a debtor’s monthly income exceeds a threshold tied to state median income. Debtors above the threshold are presumptively ineligible for Chapter 7 relief and must file under Chapter 13 instead.

The mechanical effect of the means test is to divide individual debtors into two populations with very different outcomes. One group does not make enough money and receives a complete discharge from debts in exchange for the liquidation of its non-exempt assets. That is Chapter 7. The other group is sent to Chapter 13, where these debtors effectively work for their creditors for five years before receiving discharge.

The difference between those two paths is not theoretical. A study of pro se debtors, debtors who could not afford a lawyer and filed without representation, found that the percentage of pro se Chapter 13 debtors who successfully completed their five-year plans and received a discharge was effectively zero. Pro se debtors are the ones who could not even afford counsel. They sort of careened into bankruptcy on their own, unrepresented. Zero percent of them service their debts for five years and obtain a discharge. The difference between Chapter 7 and Chapter 13 is enormous in terms of impact on a debtor’s ability to find rehabilitation in what is supposed to be a rehabilitative bankruptcy scheme.

BAPCPA’s effect on Chapter 11 was less philosophically dramatic but practically significant. The law imposed finite limits on tools that had previously allowed debtors to extend cases indefinitely. The most consequential of these for retail Chapter 11 cases was the new 210-day deadline on a debtor’s decision to assume or reject a commercial lease. Before BAPCPA, debtors could repeatedly extend the lease decision deadline, which had the effect of holding landlords and creditors hostage in cases that could not make progress. In a retail case that is so contentious it cannot move the ball down the field, the landlord does not know what is going to happen with property that is currently occupied by a debtor but might not be for very long. The landlord cannot kick the debtor out, even if the store is already closed, and cannot do anything to change the terms of the lease. The landlord has to wait for the debtor to move to reject the lease or assume it. Before BAPCPA, when a debtor was not making progress, it would just keep filing for extensions, and the courts would routinely grant them. That held landlords and creditors hostage.

BAPCPA imposed similar limits on extensions of the debtor’s exclusivity period, the window during which only the debtor can propose a plan of reorganization. The new rule allowed one extension as a matter of course. After that, the court required good cause for further extension.

The combined effect of these changes shifted the balance of the bankruptcy process meaningfully toward creditors. I will be direct about the political economy of the law’s passage. BAPCPA was a creditor-driven bill. It was institutional creditors, trade groups, and the credit card lobby. That is where BAPCPA came from.

Twenty years after BAPCPA’s enactment, the field has adjusted. Means testing is routine. The 210-day rule has become a structural feature of retail Chapter 11. But my verdict on the law is unsentimental. While 20 years later we can look back and say it was just more of the same, BAPCPA was very much a tremor that ran through the entire bankruptcy practice.

Stern v. Marshall and the Authority of Bankruptcy Courts

If BAPCPA was the most consequential statutory change to bankruptcy practice in a generation, the Supreme Court’s 2011 decision in Stern v. Marshall was the most consequential judicial change. The case, which arose from the long-running bankruptcy of Anna Nicole Smith (Vickie Lynn Marshall), addressed a question that practitioners had not, before the decision, treated as particularly urgent: what is the constitutional authority of bankruptcy judges to issue final judgments?

The answer the Supreme Court gave was narrower than the field had assumed. Bankruptcy judges, the Court held, are appointed under Article I of the Constitution. They do not enjoy the lifetime tenure and salary protection that Article III judges have. As a result, their authority to enter final judgments is constitutionally limited to matters that fall within the core of the bankruptcy case itself. Issues that arise outside that core, even if they are statutorily designated as core proceedings, must be resolved by Article III judges.

A retired Delaware bankruptcy judge of whom I am very fond characterized the decision as effectively turning all bankruptcy judges into law clerks. That captures the practical effect.

The bankruptcy bar adapted, as bankruptcy bars do. Bankruptcy is a code, much like the tax code, and if you are an attorney practicing in an area governed by a code, you learn that to get anything done, you have to find a loophole. You learn how to find areas where the code is not explicit and exploit those areas. The adaptation in the wake of Stern was consent. Practitioners began including language in orders submitted to the bankruptcy court stating that the parties agreed the court could enter the order. Consensual entry of judgment, the field discovered, sidestepped the constitutional limit Stern had identified. It became a consented-to decision rather than a judicial fiat.

The deeper tension Stern exposed has not gone away. The relationship between bankruptcy courts and district courts had always involved some friction. Stern added fuel. And the broader pattern Stern exemplified, the Supreme Court taking up bankruptcy cases and ruling in ways that surprise the practicing bar, has continued. Every time the Supreme Court takes up a bankruptcy case, an area in which justices generally have no experience, there is always the risk that they will fundamentally break the system.

That warning was relevant again in 2024, as I discuss below.

The 2008 Financial Crisis and What It Taught the Practice

The 2008 financial crisis brought the busiest period most working restructuring practitioners had ever seen, and it matured the practice in specific ways.

It matured the restructuring practice because everybody aged twenty years. Nobody slept for sixteen months! The volume and complexity of the cases that came through the system in 2008 and 2009 produced a generation of partners who learned the practice under conditions of extraordinary pressure. Many of those partners now run the restructuring departments of the major firms.

The crisis-era cases also produced important law. The General Motors and Chrysler bankruptcies in 2009, both filed under Chapter 11, demonstrated that the Code could accommodate the rapid restructuring of large, complex industrial enterprises with extensive labor and supply-chain commitments. The cases proceeded through expedited Section 363 sales of substantially all of each company’s assets, an approach that drew criticism in some quarters as a “sub rosa plan” that bypassed the formal plan-confirmation process. The Second Circuit’s affirmance of the Chrysler sale, and the Supreme Court’s subsequent vacating of that decision as moot after the sale closed, left the question partially unresolved. But the cases set a template for fast Section 363 sales in large Chapter 11 cases that would be used repeatedly in subsequent years.

Beyond the specific cases, 2008 taught the field a broader lesson about how economic contractions move through the corporate ecosystem. It was about as classic an economic contraction cycle as you could possibly hope for. The money supply tightens, which changes how companies act. People get laid off, their personal spending decreases, and that ripples back up the supply chain. Things that people buy are not being bought, so those companies start to teeter, and so on and so forth. The practitioners who lived through that cycle carry its lessons into every subsequent downturn.

The HAVEN Act: A Targeted Correction

BAPCPA produced an unintended consequence that the field eventually moved to correct, and I had a direct hand in that correction.

The means test included veterans’ disability benefits in the calculation of current monthly income, while excluding Social Security disability benefits. The result was that disabled veterans receiving disability benefits often earned too much, on paper, to qualify for Chapter 7 relief. They were funneled into Chapter 13 instead, where, as the pro se study cited above suggests, the prospect of completing a five-year plan and obtaining discharge was often slim.

Disabled non-veterans receiving Social Security disability had no such problem. Two populations with materially identical circumstances received materially different treatment under the Code based on the source of their disability income.

When I became President-Elect of the American Bankruptcy Institute in 2017, ABI had just started a commission to study the reform of consumer bankruptcy. I was a member of that commission (unusual for a business restructuring advisor) and I had the opportunity to speak with many consumer bankruptcy attorneys whose clients were hamstrung by this disparity in the bankruptcy code — the means test calculation was the mechanism producing the disparity.

When I became President of ABI in April 2018, I formed the ABI Task Force on Veterans and Servicemembers’ Affairs to address it. I chose three chairs, a genius reporter and a number of initial members. The task force became popular among ABI’s membership, and a number of ABI members, many of whom had served or were serving, signed up to help.

Key among the task force’s members was Holly Petraeus, who had built the Office of Servicemember Affairs at the Consumer Financial Protection Bureau and who understood the lives of service members and veterans in a way few other people did. She was loved by both houses of Congress and by people in both parties. When the task force created a “tiger team” to educate legislators on why a change to the bankruptcy code was needed, Holly Petraeus showed up and was an effective force multiplier. Legislators lined up to have their picture taken with her, and they lined up to listen to what she had to say.

The team must have put in a couple thousand hours of legislative affairs work, educating staffers and elected officials around the issue. Senators Tammy Baldwin and Lucy McBath had introduced a bill called the “Honoring American Veterans in Extreme Need” (HAVEN) Act, that had been languishing without traction in the 2017 Congress. The bill was reintroduced in the new Congress. Sixteen months after the task force was formed, in August 2019, both houses of Congress passed the HAVEN Act. The president signed it into law. The means test calculation was amended to exclude veterans’ disability benefits, placing disabled veterans on the same economic footing as disabled non-veterans for purposes of Chapter 7 eligibility.

The HAVEN Act is a smaller and far more focused and debtor-friendly change to the Code than BAPCPA. But it illustrates something the profession can do that the field’s largest legislative moments often obscure: targeted correction of specific failures, driven by practitioners who understand the technical detail and have the credibility to make the case. The introduction of Subchapter V of Chapter 11, created by the Small Business Reorganization Act of 2019, accomplished similar results for small business bankruptcies. Born in the ABI Commission to Study the Reform of Chapter 11, the SBRA made Chapter 11 more accessible to small business debtors, more affordable, and a less risky option for closely held small businesses — the majority of businesses in America. Passed on the same day as the HAVEN Act, those two bills cemented the American Bankruptcy Institute’s legislative influence and also brought real and positive changes to both consumer and small-business bankruptcy.

The Modern Era: Lender Control, Speed, and Strategic Filings

The bankruptcy practice that exists today is not the practice that existed in 1985 or 1995. Three structural shifts define the modern era.

The lender writes the script

The most consequential change is the transformation of debtor-in-possession lending. DIP lending has always given the lender a certain element of control. What has changed is where in the capital stack the DIP lender is relative to where it once was. Where it once was, the DIP lender was a money-center bank that was lending or managing a consortium of banks. The borrower had gotten sideways with repayment or covenants, but the DIP lender was just a bank. They were not in the equity structure. They did not own the company. They were just a bank. They lent to the debtor on a post-petition basis in order to achieve finality and to make sure the process moved forward without languishing or depleting their collateral.

What we see more and more is that the DIP lender is also the owner of all or a large portion of the company. They sit at the equity level on the capital stack. They are probably taking a management fee for owning the company in their portfolio, and they probably took out the debt and have, if not senior secured debt, then a subordinate position on the debt side of the balance sheet as well. DIP lenders are often much more insider than they used to be. As often than not, the schedule that is being put forward for the bankruptcy terminates with a sale to the DIP lender or a designated insider.

It becomes a little bit of the right hand talking to the left hand in terms of coordination. But because there is an intermediary in the form of the debtor, the parties act as though they are truly independent. Often they are not. That is the big shift. Lenders have gone from being truly uninterested outsiders, just there to loan a dollar and get paid $1.10, to a tangle of intertwined interests at every level of the capital structure. (I have written more on this in DIP Financing: When the Lender Writes the Script.)

Speed and the death of the true prepack

A second modern shift involves the increasing prevalence of fast cases. Prepackaged Chapter 11 cases, in which the debtor solicits creditor support for a plan before filing and then proceeds through bankruptcy in days or weeks, are sometimes described as the modern default for sophisticated filings. That framing is wrong.

Prepacks have never been the default. There was a time when they were the aspirational default. The giant, big, precedent-setting cases in the fifteen or twenty years after the Code’s enactment, those were cases that went in on a Monday and were confirmed on a Thursday, because they had done the work of coming up with a plan, soliciting support, getting the votes, and going to court with a result that would not have been any different no matter how much time you threw at it. You would just decrease the value by waiting.

What changed was the position of the fulcrum creditor, the creditor whose recovery is determined by the debtor’s enterprise value at the margin. In the era of true prepacks, the fulcrum creditor was usually the unsecured creditors. The unsecureds were in the money. They would be the ones to get equity, but they did not necessarily want to own the company. They just wanted a healthy customer. That alignment of interests made fast cases workable.

Now, with credit conditions tightened and capital structures more leveraged, the fulcrum has moved up the capital stack. If you are lucky, you get past the first lien. You maybe get a “pre-arranged” case where you have the senior secured lender on board and some portion of the second-lien tranche of noteholders. You might get eighty percent of the noteholders voting. The other twenty percent are going to hire the meanest, angriest junkyard-dog bond lawyer they can find, and they are going to object to everything forever. So your prepack just became a pre-arranged case. After the first objection, it is a pre-suggested case. Then there is a creditors’ committee, and now we are paying bondholders’ counsel and committee counsel, and they are running investigations, and we just wanted to get out of bankruptcy. Pre-packs as a default? Not so much. They are a rarity now.

Strategic filings and out-of-court restructurings

The third modern shift involves the use of bankruptcy and bankruptcy-adjacent tools as strategic instruments. The Texas Two-Step structure, in which a company facing significant tort liability uses Texas’s divisional merger statute to separate the liability into a new entity that then files for Chapter 11, has been one of the more contested examples. Johnson & Johnson’s two LTL Management filings, both dismissed by the Third Circuit as bad-faith filings, are the most famous. Other companies have attempted variations with mixed results.

I will be direct. Texas was, in the words of former Texas journalist Molly Ivins, the national laboratory for bad government. The Texas Two-Step is one of those instances. The fact that there is a law on the books in Texas saying that a corporation can do a divisive merger and put all of the liabilities in one entity and all of the assets in another, and that this is not a fraudulent transfer, is amazing to me. You take a company that has a viable core business and assets and a bunch of liabilities, and you create one entity that holds the operating business and another entity that holds the liabilities. The liability entity files bankruptcy. In the LTL cases, there was even an indemnity arrangement guaranteeing the liability entity against excess litigation exposure, which raised the obvious question of why bother filing at all.

Out-of-court liability management exercises, or LMEs, have grown sharply over the same period as a quasi-bankruptcy alternative for distressed corporate debtors. I am skeptical they represent a genuinely new category. LMEs are basically a Texas Two-Step in another fashion. Instead of taking a beleaguered company and creating two entities, you are creating an LME, which is going to be the entity that holds the liabilities. It is something we have already been exposed to, just wearing a slightly different blazer. We are seeing the practical result, which is that a lot of LMEs start and fail.

The Supreme Court’s 2024 decision in Harrington v. Purdue Pharma limited a related strategic tool: the use of nonconsensual third-party releases in Chapter 11 plans. Purdue Pharma’s plan would have channeled opioid-related claims through the bankruptcy and released the Sackler family from related liability without their having filed for bankruptcy themselves. The Court held that Chapter 11 does not authorize such nonconsensual releases.

My read of the Court’s reasoning is more measured than some commentary has suggested. Bankruptcy courts can really only do one thing. They can move money from one party to another. What the holdouts in Purdue Pharma were complaining about was that it was not enough money. In some respects, they got what they wanted. They got an increased amount of money from the Sacklers, to the benefit of everybody. What some of the objecting parties wanted was blood. They wanted the Sacklers to go to jail. The problem with that is that if the government had been able to prosecute the Sacklers, it would have. It could not. There was not a prosecutable case. So you are left with what you are left with, which is a pool of money offshore and people willing to redomesticate it and put it to use to buy releases.

The post-Purdue practice has adapted, as the field tends to do. The workaround is that you still try to put forward a plan with nonconsensual third-party releases and see if anybody objects. If they do, you narrow them. The practice evolved, and now it tries to accomplish the same thing it did before. If someone objects, you adjust. If they do not, you have your release.

Healthcare bankruptcies as a distinct category

One sectoral feature of the modern era deserves specific attention. Healthcare bankruptcies, including Genesis Healthcare and Prospect Medical filings in 2025, have been an active and unusual category. Healthcare bankruptcy practice differs meaningfully from other industries because of the regulatory overlay.

There are things you cannot do with a hospital or other patient-facing business that you can do with everything else. You can close a hotel tomorrow and kick the guests out if you need to. You cannot do that with a hospital. Add to that all of the federal regulations and state regulations governing healthcare. New York, for example, prohibits for-profit hospitals entirely. Nearly all hospitals in the state are nonprofit, and their financing, design and construction are overseen by the Dormitory Authority of the State of New York, which becomes an active participant in nearly every healthcare bankruptcy case in the state.

The regulatory complexity does not translate cleanly to a profitability story. Just because a hospital is not-for-profit does not mean it is not profitable. Look at the Montefiore Health System, one of the largest urban healthcare providers in the country. Profitable, well-run, well-optimized. Behind a billion-dollar gift to Albert Einstein Medical School. You can have a well-run not-for-profit hospital, and you can also have a terribly run for-profit hospital. Whether there are shareholders is not the issue.

The deeper questions facing the sector are structural. Are there too many hospital beds for the population being served? Too many hospitals, period? How do you support rural hospitals, and how many do you need? Should we change how we envision the delivery of emergency care versus inpatient care on a non-emergent basis? Maybe Ogdensburg, New York does not need a full standalone hospital while Canton and Potsdam each have their own. Maybe you put one full standalone hospital in the middle and run urgent-care centers in the outlier regions that feed patients to the central hospital after stabilization. The same logic applies to dense urban regions. The healthcare bankruptcy practice has become a place where these questions could get answered case by case.

Retail Chapter 11 today

The wave of retail bankruptcies in recent years (Forever 21, Eddie Bauer, Rite Aid’s second filing, and others) has prompted some commentary suggesting that retail Chapter 11 is broken. I disagree with the framing. Just because retailers are having a hard time staying out of Chapter 11 does not mean Chapter 11 is not functioning the way it is supposed to. It just means the retailers are failing, and their plans were not feasible to begin with. The Rite Aid example is instructive. The first Rite Aid Chapter 11 plan was confirmable largely because the professionals working on the case needed it to be confirmable. Whether it was a viable business plan was a different question.

The Constant Beneath the Changes: Negotiation Is the Work

Forty-seven years after the 1978 Code took effect, the procedural surface of bankruptcy practice has changed substantially. The means test, the 210-day rule, Stern v. Marshall, the rise of the insider DIP lender, the death of the true prepack, the contested use of strategic filings, the expansion of out-of-court liability management. Each has reshaped how practitioners do their work.

What has not changed is the core of the work itself. After nearly five decades of procedural evolution, my answer to what remains constant is one word.

Negotiation.

Restructuring is about negotiating with creditors. Bankruptcy itself is an invitation to negotiate. That still requires people on opposite sides of the issue who are willing to find win-win solutions.

The procedural framework changes. The constituencies change. The capital structures change. The legal doctrines change. What does not change is that a bankruptcy case is, at its core, a structured negotiation among parties whose interests do not align, conducted under the supervision of a court whose role is to ensure the process serves the purposes the Code was designed to serve. The advisors who succeed in this practice are the ones who understand both the technical detail and the human dynamics of that negotiation. The Code, the cases, and the case law are the framework. The negotiation is the work.

Forty-seven years on, that has not changed. It probably will not.

Frequently Asked Questions

When was the modern U.S. Bankruptcy Code enacted?

The Bankruptcy Reform Act of 1978 took effect in 1979 and replaced the Bankruptcy Act of 1898. The 1978 Code introduced bankruptcy judges (replacing the previous bankruptcy referees), created the U.S. Trustee program, and consolidated the chapters that organize today’s practice, including Chapter 7 for liquidation, Chapter 11 for reorganization, and Chapter 13 for individual repayment plans.

What did BAPCPA change about bankruptcy practice?

BAPCPA, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, introduced the means test for individual Chapter 7 filers. Debtors whose monthly income exceeds a threshold tied to state median income are presumptively ineligible for Chapter 7 and must file under Chapter 13 instead. BAPCPA also imposed new limits on Chapter 11 practice, including a 210-day deadline for debtors to assume or reject commercial leases and tighter restrictions on extensions of the debtor’s exclusivity period for proposing a plan of reorganization.

What is the HAVEN Act?

The HAVEN Act, passed in August 2019, amended the BAPCPA means test to exclude veterans’ disability benefits from the calculation of current monthly income. Before the HAVEN Act, disabled veterans receiving disability benefits often appeared to earn too much to qualify for Chapter 7 relief, while disabled non-veterans receiving Social Security disability did not face the same calculation. The legislation was driven by the ABI Task Force on Veterans and Service Members Affairs, which Ted Gavin formed during his ABI presidency.

What did Stern v. Marshall change about bankruptcy courts?

The Supreme Court’s 2011 decision in Stern v. Marshall held that bankruptcy judges, who are appointed under Article I of the Constitution, lack the constitutional authority to enter final judgments on issues outside the core of the bankruptcy case. The decision narrowed the practical authority of bankruptcy courts and prompted the practice of including consent language in court orders, allowing the parties to authorize the bankruptcy court to enter rulings that might otherwise require an Article III judge.

What is the means test in bankruptcy?

The means test is a calculation introduced by BAPCPA in 2005 that determines whether an individual debtor qualifies for Chapter 7 bankruptcy. It compares the debtor’s monthly income to the median income for a household of the same size in the debtor’s state. Debtors whose income exceeds the threshold are presumptively ineligible for Chapter 7 and must instead file under Chapter 13, which requires committing excess monthly income to creditor payments over five years.

How has DIP lending changed in modern Chapter 11 cases?

Debtor-in-possession financing has shifted significantly from its earlier form. DIP lenders were once primarily money-center banks providing financing without holding equity in the borrower. Today, DIP lenders are often also significant equity holders or debt holders in the same company, with cases frequently structured to terminate in a sale to the lender or its designated insider. This insider relationship reshapes how Chapter 11 cases proceed and what outcomes they produce.

What is the difference between Chapter 7 and Chapter 11?

Chapter 7 is liquidation. The debtor’s non-exempt assets are sold by a trustee, the proceeds are distributed to creditors, and the debtor receives a discharge of remaining eligible debts. Chapter 11 is reorganization. The debtor typically remains in possession of its assets and operates the business while developing a plan to restructure debts and obligations. Chapter 11 is most often used by businesses, though individuals with high asset or debt levels can file under it as well.

What does it mean to file Chapter 11?

Filing Chapter 11 is a form of reorganization under the U.S. Bankruptcy Code. The debtor (commonly a business but can also be a high-debt or high-net-worth individual) files a petition with the bankruptcy court, an automatic stay halts most creditor collection actions, and the debtor typically remains in possession of its assets while developing a plan to restructure its debts and obligations. The plan must be voted on by classes of creditors and confirmed by the court. Chapter 11 is most often used by businesses but is available to individuals with high asset or debt levels.

About the Author

Ted Gavin is the Managing Director and Founding Partner of Gavin/Solmonese. He served as President of the American Bankruptcy Institute from 2018 to 2019. During his presidency, he formed the ABI Task Force on Veterans and Service Members Affairs, which drove the legislative effort behind the HAVEN Act of 2019. He is a Certified Turnaround Professional and Certified Professional Mediator, and has served as plan administrator, fiduciary, expert witness, and restructuring advisor in numerous large and complex bankruptcy cases, including the Montgomery Ward liquidation, the largest retail liquidation in American history.

For more on the firm’s bankruptcy and fiduciary advisory work, see Bankruptcy & Fiduciary Services and The Role of a Fiduciary in Chapter 11 Bankruptcy.