FAQ

A bankruptcy “claim” is a creditors legal right to payment of what it was owed by the debtor at the time the debtor filed for bankruptcy protection.

You should file a proof of claim even if you agree with the scheduled amount since debtors are able to amend schedules throughout the case.  The proof of claim includes a form, which can be found here, and the backup documentation to substantiate the claim.

No. One of the fundamental principles of United States bankruptcy law is that the Debtor is protected from attempts by its creditors to receive payment. There are very few, limited exceptions to this rule that we can discuss and that you can discuss with your attorney.

In a chapter 11 case, debtors make distributions on account of bankruptcy claims under the terms of a Chapter 11 Plan. The Chapter 11 Plan must be approved by the Bankruptcy Court before payments are made to creditors. The process to submit and obtain approval of a Chapter 11 Plan typically takes many months and often does not occur in the first year of the Bankruptcy Case.

When a creditor gets paid is determined by the terms of the Bankruptcy Court approved chapter 11 plan. Many times, the Chapter 11 Plan requires the Debtor to make a series of payments to its creditors over time. It is not uncommon for payments to commence months or years after the bankruptcy case has started, and to continue with additional payments that follow over subsequent years. As discussed below, these payments may or may not be in cash.

There is no guarantee that a creditor will receive what it is owed. In most bankruptcy cases, creditor receive only pennies on the dollar of what they actually are owed. One principle purpose of the Bankruptcy Case is to approve less than full payment to creditors in a manner that the Bankruptcy Court determines is fair.

Some chapter 11 debtors make cash payments to their creditors. However, it is frequently the case that debtors provide their creditors with distributions in the form of interests in a creditor trust or a form of stock in the reorganized debtor. These interests (whether equity or in a trust) may or may not be liquid, either because there are restrictions on transfer in the instruments themselves or because there are not willing purchasers.

Selling your bankruptcy claim has many advantages, including:

1. Liquidate your claim. By selling your claim now, you can obtain cash for an otherwise uncollectible account.
2. Avoid the risk of delayed recovery. Many bankruptcy cases take 2 years or longer to resolve, and any payments under a chapter 11 plan may not begin (or be paid in full) for years thereafter.
3. Avoid the risk of illiquid recovery. Instead of cash distributions, many bankruptcy cases give creditors as payment equity in the reorganized debtor or interests in creditor trusts. These securities and trust interests may or may not be liquid, either because there are restrictions on transfer in the instruments themselves or because there are not willing purchasers.
4. Avoid additional expenses. Following and/or participating in the debtor’s bankruptcy case to protect and preserve your rights often involves reading legal notices and consulting with attorneys for the duration of the bankruptcy case.
5. Obtain an immediate tax deduction for any loss. If you sell your claim for less than full value, which is typical, you may be able to take a tax deduction for the loss. Please consult your accountant.
6. Remove receivables from balance sheet.

Traditionally, claim holders have received only unsolicited offers to purchase their claim for a set price. With no other offers or known potential purchasers, the seller does not know whether another potential purchaser may pay more for their claim, and thus cannot make an informed decision to sell the claim. Many purchasers take advantage of this lack of a marketplace to purchase claims for less than what they or other sellers would be willing to pay. A broker will canvas the market of potential purchasers to obtain the highest offer for your claim.

There may be many reasons not to sell your bankruptcy claim.

• Preserve setoff or recoupment rights. If you have significant setoff or recoupment rights against the Debtor, consider the value of these rights and whether you can preserve them as part of any claim sale.
• You sit on a creditor or other committee in the case. If you currently sit on a creditors committee or other committee in a chapter 11 case, you may owe fiduciary duties that you should consider in connection with any sale. You also may be subject to specific or general court orders regarding claim sales. In this event, please contact counsel prior to finalizing any sale.
• To influence the case. If you sell all of your claims against the Debtor, you may lose formal standing to appear and be heard in the Bankruptcy Court, and your influence over the Bankruptcy Case may diminish. If you wish to play an active role in the Bankruptcy Case you may wish to keep all or some of your claim(s).
• Prefer to wait and see. After receiving offers for your bankruptcy claim, you may prefer to hold your claim and see what the Debtor will pay you under the terms of a Chapter 11 Plan. By first engaging a broker you will have a purchase price to consider when making this decision. Of course, you do not pay Bankruptcy Claim Exchange anything if you ultimately decide not to sell your claim.

1. Execute a claims brokerage agreement with Bankruptcy Claim Exchange.
2. Allow us to shop your claim among all know potential purchasers.
3. When we receive the best offer for your claim, consider whether the purchase price is sufficient for you to sell.
4. If you agree in principle, or as part of negotiations, the purchaser may want to perform diligence on you or your claim.
5. Agree to terms with the buyer.
6. Execute a written sale agreement with the buyer. This written agreement can be as simple as a one page transfer of claim, or as complicated as a multi page claim purchase and sale agreement, often depending on the value of the claim being sold.
7. The purchaser next may be required to file a notice of transfer of claim with the Bankruptcy Court.

Purchasers prefer to obtain claims that are:

• Liquidated as to amount, not disputed by the Debtor, and not contingent (these designations are identified in the Debtor’s schedules on file with the Bankruptcy Court).
• Held by creditors that are not likely to be sued for preferential transfers.
• Likely to be repaid in full (or nearly in full) and/or likely to repaid early in the case, which is possible with certain types of prepetition claims that are treated by the Bankruptcy Code as administrative expenses or priority claims.

We can discuss all of these details with you, and discuss the particulars of your claim.

Buyers are often hedge funds, private equity groups, or other investment vehicles looking to diversify their investments. These purchasers often are sophisticated players in the distressed asset market who expend significant resources following bankruptcy cases before making purchase decisions (as discussed below).

There are many valid reasons for investors or others to purchase bankruptcy claims.

• Investment gain. Some investors purchase many bankruptcy claims from different cases. They are willing to assume significant risks of timing and repayment in pursuit of above-market gains. These investors generally purchase claims in multiple cases (as well as other asset types) to diversify the significant risks they assume.
• Case control. Some existing creditors or outside parties will purchase small or large amounts of bankruptcy claims to obtain or increase their standing in the Debtor’s bankruptcy case. Holding claims or large amounts of claims provides these parties with influence in the Bankruptcy Case. These types of buyers generally retain sophisticated lawyers and advisers to represent their interests in the Bankruptcy Case in an attempt to influence the Bankruptcy Case and its exit.
• M&A Strategy. Investors purchase claims to invest in the capital structure of the to-be-reorganized debtor. Often times, these purchasers obtain claims in order to obtain equity in the to-be-reorganized debtor.

No.  Bankruptcy Claims have not been treated as “securities” for purposes of state or federal securities laws. Although state or local laws may change, currently there is essentially no regulatory framework surrounding the buying and selling of bankruptcy claims. Of course, common laws of contract and fraud (among others) still apply. Please consult an attorney with any questions or concerns.

Many sellers may have a preferred form of transfer agreement, often with provisions favorable to the purchaser. Every agreement should be reviewed by attorneys for both sides prior to being executed. Terms common to many claim purchase and sale agreements include the following:

• Purchase price.
• Description of the Claim.
• Triggers to rescind all or a portion of the agreement. Many agreements will unwind, in full or in part, in the event that the claim purchased becomes disallowed, subject to objection, impaired or subordinated in the bankruptcy case (events where the claim is found to be defective, reducing or abolishing any distribution to the claim purchaser).
• Seller representations. Many purchasers will seek the seller to guarantee that (a) the claim is valid and allowable in a certain amount, (b) the seller is authorized to sell the claim, (c) there are not defenses to the claim being allowed, (d) no payment has been made on the claim, (e) the seller has not received any payments from the Debtor in the 90 days prior to the bankruptcy, (f) the claim is not subject to liens or encumbrances, and (g) other representations typical in sale contracts.
• What happens if a representation is broken or a claim is objected to. In the event that a representation is broken (including if a claim is objected to), the purchaser may seek to unwind the transaction. Some purchasers will request that the seller pay interest to the purchaser for the time between the sale and the breach. You may want to negotiate who defends an objection to the validity of your claim.

As part of our service to you, we will discuss these and similar terms with you and with any attorney you may choose to engage.