The Declining Role of Big Law in Bankruptcy: A New Era for Distressed Debt Markets

The distressed debt markets of 2025 are undergoing a seismic transformation. Traditional law firms, once the gatekeepers of bankruptcy proceedings, are ceding ground to alternative legal service providers (ALSPs), private credit funds, and tech-driven solutions. This structural shift is not merely a temporary trend but a redefinition of how capital is allocated, risks are managed, and value is extracted in distressed scenarios. For investors, understanding this evolution is critical to navigating a landscape where speed, agility, and innovation now trump legacy hierarchies.

Legal Disintermediation: The End of the Big Law Monopoly

The decline of traditional law firms in bankruptcy is rooted in the rise of legal disintermediation—a process where stakeholders bypass adversarial Chapter 11 proceedings in favor of pre-negotiated restructurings. These out-of-court solutions, such as restructuring support agreements (RSAs) and liability management exercises (LMEs), prioritize collaboration over litigation. By leveraging pre-packaged restructurings, borrowers can avoid the rigid constraints of the Absolute Priority Rule, enabling layered recovery structures that prioritize key creditors while preserving critical assets.

This shift is driven by cost efficiency and speed. Traditional Chapter 11 cases, which can take years and cost millions in legal fees, are increasingly replaced by streamlined processes. For example, LMEs—transactions like up-tier exchanges and drop-downs—allow debtors to restructure obligations without formal bankruptcy, though they face legal challenges from non-participating creditors. The result is a market where nimble players, not entrenched law firms, dictate terms.

Quantitative data underscores this trend. The Thomson Reuters Institute's ALSP 2025 Report reveals that ALSPs captured 14% of the legal services market since 2015, with the ALSP market size reaching $28.5 billion in 2023 (18% CAGR since 2021). Traditional law firms' share of outside legal spend has fallen from 90% in 2015 to 86% in 2023. While firms like Holland & Knight and Morrison & Foos remain active in high-profile cases (e.g., crypto bankruptcies), their role is increasingly confined to complex litigation and cross-border insolvencies.

The Rise of Automated Legal and Financial Tools

While the adoption rate of AI in bankruptcy proceedings remains opaque, the broader legal sector's embrace of automation is reshaping workflows. AI-driven tools are streamlining due diligence, contract analysis, and financial modeling, reducing the need for traditional legal labor. For instance, ALSPs like Kira Systems and Luminoso leverage machine learning to parse thousands of contracts in hours, accelerating restructuring timelines.

These tools are particularly valuable in distressed scenarios, where time is of the essence. By automating repetitive tasks, they free up human capital for strategic decision-making. However, adoption has been slower than anticipated. A 2025 Bloomberg Law survey found that while 75% of attorneys expected AI to automate workflows in 2024, only 37% reported tangible results by 2025. Regulatory caution, data privacy concerns, and the complexity of bankruptcy-specific tasks have tempered progress.

Capital Reallocation: Private Credit and Real Estate Repurposing

The erosion of Big Law's dominance is paralleled by a reconfiguration of capital flows. Private credit funds and private equity sponsors are outpacing traditional banks in distressed debt markets, offering rescue financing with investor-friendly terms (e.g., PIK interest, preferred equity kickers). These entities combine financial flexibility with operational expertise, enabling them to revitalize struggling companies or repurpose assets.

Real estate and retail sectors exemplify this shift. Rising interest rates and expiring government assistance programs have triggered a wave of defaults, creating opportunities for investors to purchase non-performing loans at discounts. For example, private credit funds are stabilizing distressed commercial real estate through bridge financing, then repurposing properties via adaptive reuse projects (e.g., converting office buildings to multifamily housing).

Private equity firms are also leveraging bolt-on acquisitions to integrate distressed assets into existing portfolios, unlocking synergies. This contrasts with traditional banks, which often lack the agility to structure such deals.

Investment Implications and Actionable Insights

For investors, the structural shifts in distressed debt markets present both opportunities and risks. Key allocations should focus on:

1. Private Credit Funds: Firms like Apollo Global Management (APO) and Blackstone (BX) are expanding their distressed debt portfolios, leveraging agility to outperform traditional lenders.
2. Specialized ALSPs: Companies offering AI-driven restructuring tools (e.g., Kira Systems, Luminoso) are well-positioned to benefit from the automation trend.
3. Real Estate REITs: Firms engaged in adaptive reuse, such as Prologis (PLD), stand to gain from the repurposing of commercial assets.

Investors must also remain vigilant about risk. While private credit offers higher returns, it requires careful due diligence to avoid overleveraged assets. Similarly, the reliance on automated tools demands scrutiny of data quality and regulatory compliance.

Conclusion: Embracing the Disintermediation Revolution

The decline of Big Law in bankruptcy is not a temporary disruption but a structural reordering of the distressed debt ecosystem. As legal disintermediation accelerates, investors who embrace alternative debt managers, private credit providers, and tech-enabled legal solutions will outperform those clinging to traditional models. The future belongs to those who prioritize speed, adaptability, and collaboration—qualities that define the new distressed asset landscape.

For now, the data tells a clear story: the gatekeepers are gone, and the market is rewriting the rules. Investors who act decisively will find themselves at the forefront of this transformation.