Ask The Attorney: Deciding Whether To Sell Your Bankruptcy Claim

Q: When a company files bankruptcy, how do I know if I should sell my unsecured claim to a claim buyer or hold on to it and get paid through the bankruptcy process?

Businesses often face situations where a customer files a Chapter 11 bankruptcy and the business is saddled with an unsecured claim against the customer, not knowing when or how much it will recover on the claim. One alternative is to sell the claim to a third-party claim buyer at a negotiated percentage of the face amount of the claim. Selling the claim allows the creditor to monetize the claim quickly and avoid what could be months or years of delays. However, selling the claim at a discount also means you could lose revenue if the purchase price you receive is significantly less than the amount of the distributions in the bankruptcy case. Consider the following to help decide whether to sell your claim or hold on to it:

• Determine if your customer will likely object to the amount of your claim. Has the customer raised issues with the quality of the goods or services you provided? Does your claim amount match the amount that the customer listed in its bankruptcy schedules? Do the schedules list the claim as disputed, contingent, or unliquidated? Can the customer seek a setoff against the claim to reduce the amount owed? Claim buyers are not interested in purchasing disputed claims. They will likely require the seller to repurchase the claim if the customer objects to the claim. Retaining the claim will give you the opportunity to work out any disagreements directly with the customer.
• Review publicly available information about the bankruptcy. All documents in a bankruptcy case are publicly available on an electronic docket. Review the customer’s schedules of assets and liabilities, sale motions, first day declarations, and projected recoveries for creditors in a disclosure statement. Review of a disclosure statement is particularly useful in “prearranged” Chapter 11 cases, and unsecured claims usually receive a 100% recovery in “prepackaged” Chapter 11 cases. Reviewing bankruptcy court documents will assist you in determining the amount of recoveries that unsecured creditors will likely receive in the bankruptcy case. There are also several publications that follow distressed companies and bankruptcies, which may also provide insight into likely creditor recoveries.
• Identify the events that led to the customer’s bankruptcy. Was it a general downturn in the economy or in the customer’s industry? Does the customer intend to sell some or all of its assets through the bankruptcy process? Was there a triggering event that precipitated the bankruptcy (e.g., fire, discovery of financial fraud, inability to obtain certain raw materials, a significant class action lawsuit)? An overall deterioration in the customer’s finances often means an extended stay in bankruptcy and uncertain prospects for a successful reorganization – making a quick sale to a claim buyer a more appealing option. By comparison, filing a bankruptcy case to consummate an expedited sale of the business to an identified proposed buyer, to centralize litigation, or to address a discrete operational issue suggests a shorter stay in Chapter 11 and better odds of receiving a meaningful recovery – weighing in favor of retaining your claim and waiting for the payout under the bankruptcy plan.
• Find out how much claim buyers are willing to pay. Purchase offers of less than 5 percent suggest claim buyers believe recoveries will be nominal. This weighs in favor of selling your claim quickly to monetize it and to avoid long delays followed by a nominal recovery. Conversely, substantial purchase price offers (or wide ranges in offer amounts) suggest the market believes the unsecured bankruptcy claim has significant value. Accordingly, holding your claim in such situations may be rewarded with a more substantial recovery than you would receive if you sold the claim. However, never base a decision on a single offer – always seek offers from multiple buyers.
  
  

Reprinted with permission from the April 2022, issue of ABC-Amega's newsletter. © 2022 ABC-Amega, Inc. All Rights Reserved.