What Are the Benefits of Trading Your Bankruptcy Claim?

Claim trading in bankruptcy offers several benefits for creditors:

1. Immediate Cash Liquidity: By trading their Chapter 11 bankruptcy claims, creditors can quickly obtain cash for an otherwise uncertain and potentially uncollectible account. With a 4-step process, trading claims in bankruptcy eliminates the risk of delays in receiving payments from a prolonged Ch.11 bankruptcy case. Buying your bankruptcy claim allows you the creditor to reinvest in your company promptly.
2. Elimination of Recovery Risk: Unsecured creditors often face low or no recovery from a Chapter 11 bankruptcy estate, as they rank lowest in priority for payouts. When you sell your bankruptcy claim, you secure a definite recovery. Buying your bankruptcy claims avoids your uncertainty of receiving little or nothing after higher-ranking creditors and administrative expenses are paid. There are at least three kinds of risk to consider when selling and buying bankruptcy claims.
3. Elimination of Consideration Risk: Chapter 11 bankruptcy debtors may offer alternative forms of payment, such as promissory notes or stock equity, which can be difficult and time-consuming to liquidate into cash. When you trade claims in bankruptcy, you eliminate this risk, ensuring creditors receive immediate cash instead.
4. Reduction of Time and Costs: Participating in Chapter 11 bankruptcy cases involves significant paperwork, correspondence, and potential legal expenses. By trading your claim in bankruptcy, creditors can avoid the time, money, and resources expended in navigating the complex bankruptcy proceedings.
5. Benefit from Tax Savings: Creditors can often benefit from tax deductions when selling their Chapter 11 bankruptcy claims, particularly if the amount received is less than the original claim value. This immediate tax advantage is not available to creditors who remain in the bankruptcy case and receive bankruptcy claim payouts over time.

Overall, claims trading provides creditors with valuable advantages, including cash liquidity, risk mitigation, and cost savings, allowing them to focus on their business growth and financial stability.

Who’s Involved When a Bankruptcy Claim is Traded?

The bankruptcy claim trading process involves two main parties: the buyer and the seller. The seller is the creditor who wants to trade their uncollected bankruptcy receivable to a claims trader against a debtor in a Chapter 11 bankruptcy case. The buyer is typically a bankruptcy claims trading firm, which purchases the creditor’s claim rights and ownership.

Buyers can vary in type and size, ranging from hedge funds, trading divisions of investment banks, private investment companies, to individual accredited investors. Sometimes, a claims trading brokerage or related company may act as an intermediary to facilitate the transaction. Our bankruptcy claims trading blog offers more information about this process, along with this deeper dive into selling a bankruptcy claim.

Other parties involved in the trade claim process include legal and financial advisors, Chapter 11 bankruptcy claims agents, and the bankruptcy court. Legal and financial advisors assist in negotiating and finalizing the transaction, handle dealings with the bankruptcy court, assess claim value, perform due diligence, and ensure all parties reach a contractual agreement.

A bankruptcy claims agent, while not a party to the Chapter 11 claim being traded, may be involved as a contracted partner of the debtor within the bankruptcy court case. They act as the approved legal administrator for the Claims Registrar, overseeing bankruptcy claim trades and court filings.

The bankruptcy court is responsible for officially recording the ownership transfer of the claim and notifying the debtor in the case. It also approves any legal objections, dismissals, or modifications to payment terms on claims. However, the court does not oversee the specific details of the claim trade itself.

How Does the Claims Trading Process Work Today?

The claims trading process in bankruptcy involves several steps that allow creditors to sell their claims to interested buyers. Here is a summary of the process:

1. Filing a Proof of Claim: When a debtor files for bankruptcy, creditors receive a notice and, depending on the circumstances, may submit a proof of claim (Form 410) to assert their right to repayment.
2. Listing the Claim for Sale: Creditors separately list their bankruptcy claims for sale, seeking prospective buyers directly or through brokers.
3. Buyer Contacts the Creditor: Buyers interested in purchasing the claim reach out to the creditor, expressing their interest in the transaction. You the creditor, as the bankruptcy seller, may also contact us for a bankruptcy trade claim bid request to start the process yourself.
4. Providing Additional Documentation: Upon receiving an offer, the creditor provides additional documentation to support the validity and value of their claim.
5. Buyer Performs Due Diligence: Buyers conduct due diligence on the claim and the debtor’s bankruptcy case to assess the risks and potential returns.
6. Buyer Makes an Offer: The buyer presents a formal purchase offer to the creditor, with the price depending on the bankruptcy proceedings and case developments.
7. Creditor Accepts the Purchase Offer: After reviewing the offer and seeking legal and financial advice, the creditor formally accepts the offer.
8. Trade Confirmation: The buyer sends the creditor a trade confirmation, documenting the material terms of the agreed-upon sale, including the claim details and purchase price.
9. Assignment of Claim Agreement: Both parties sign an “assignment of claim” agreement, outlining the terms and conditions of the sale.  In some cases a buyer will move right to an assignment agreement and skip the trade confirmation step entirely.
10. Buyer Files a Claim Transfer: The buyer files a claim transfer with the bankruptcy court to officially transfer ownership of the claim to the buyer.
11. Buyer Sends Payment: The buyer sends payment to the creditor, and the claim ownership may change before the court processes the claim transfer.
12. Buyer Becomes the New “Creditor”: Once the claim transfer is complete, the buyer is listed as the new “creditor” in the bankruptcy case, and the former creditor is no longer involved, except in specific agreed-upon circumstances.

The claims trading process can be legally and financially complex and may vary slightly from one trade to another. Creditors should carefully review the terms of the agreement and seek professional advice to ensure a successful and secure transaction.