Some people only think of the negatives when it comes to bankruptcy, but investment banks and venture capitalists have found bargain deals in claim trading by purchasing the "claims" of creditors against companies that go bankrupt in order to profit from restructures.
When creditors are notified of a bankruptcy, they file claims for money owed such as when a supplier files a claim for products unpaid. These rights to payment or claims are routinely bought and sold based upon the buyer's and seller's expectation of the recovery in the case.
The sellers of bankruptcy claims may sell their claims at discount. Some people think that just because a company has filed bankruptcy, they may never get paid. These creditors would rather recover something and get paid as soon as possible rather than risk holding out for a better return in the future. After assigning the claim, the seller should monitor to make sure that it is paid when the payment conditions are met.
Buyers of claims search bankruptcy court dockets for potential sellers. They pay for claims when they think there is an eventual payout to them, and deduct a commission. For example, if a claims trader is offering to pay 40 cents on the dollar, that trader believes the value of the claim will increase above 40 cents. Trading bankruptcy claims is regulated by the Bankruptcy Code Rule 3001(e), and contract principles. Claim rights transfer as if the investor had paid the full face value for the claim, even if the actual purchase price was discounted from the face value.
Filing a proof of claim or understanding the payment of claims may be complicated. Schedule a FREE initial consultation with a bankruptcy attorney.
