A Primer on Selling Bankruptcy Trade Claims

If 2020 taught us anything, it is to prepare for the unexpected. The unprecedented events experienced in 2020, including the COVID-19 pandemic and the resulting severe economic stresses felt both domestically and globally, strongly suggest continued market challenges and an increase in bankruptcy filings in 2021 and possibly 2022.

The energy and retail sectors have been hit particularly hard, with the number of Chapter 11 filings of billion-dollar companies at levels unimaginable just a year ago. Businesses across the country are navigating state and federal safety restrictions and shutdowns, the travel and leisure industry is nearly nonexistent, and unemployment continues to run at historically high levels. As a result, many more businesses throughout the broader economy are expected to seek to reorganize, or sell their assets, through Chapter 11 over the next several years.

A credit professional, faced with a customer’s bankruptcy filing, might consider selling their company’s trade claim to a claims buyer. While the bankruptcy claims trading market has grown steadily over the past decade, there has been a recent explosion of sale of claims that offers trade creditors holding claims against bankrupt customers more options and opportunities to quickly convert those claims to cash. Selling a trade claim to a claims buyer provides a creditor with an upfront, though discounted, cash payment for the claim, in lieu of having to monitor its customer’s bankruptcy case for months or years, uncertain what, if any, distribution will be made by the debtor through the end of the case.

This article provides an overview of the motivations of the participants in the bankruptcy claims trading market, the mechanics underlying claim transfers, troublesome and the most frequently negotiated provisions in claim assignment agreements, and tips for how to maximize the purchase price for the sale of a claim.