Make Chapter 11 A Shorter Story

The heads of the big three airlines--American, United, and Delta--are complaining that the bankruptcy laws give ailing competitors an unfair advantage. On Jan. 6, Stephen M. Wolf, UAL's CEO, even wrote Bill Clinton calling for a commission to study the bankruptcy laws. The airline executives argue that the 20% of their industry that has taken shelter under Chapter 11 of the bankruptcy laws can charge bargain prices and force healthier carriers to match the fares or lose market share.

And airlines aren't alone in criticizing Chapter 11 these days. Pensioners and labor unions want Congress to boost their standing in bankruptcies so that they will be able to collect before other creditors, such as banks. Creditors and shareholders want to get a crack at submitting their own reorganization plans before it's too late to save the ailing company. And some academics want to scrap Chapter 11 and let the market decide the sick company's fate.

When it took effect in 1979, Chapter 11 was intended to help troubled companies get back on their feet by temporarily keeping creditors at bay. Promoting reorganizations over liquidations to preserve jobs and assets makes sense in theory. But as a practical matter, Chapter 11 can drag on too long, costs too much, and gives debtors too much power.

But Congress mustn't rush into reforming the law to satisfy special groups. It should aim for changes that give creditors and shareholders a greater say in the process. Lawmakers should set tight deadlines for all parties to submit reorganization plans. That way, a company can't languish in Chapter 11 and waste assets--and is less likely to bring down competitors.

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