How Selling Your Bankruptcy Claims Can Benefit You as a Creditor
Claims trading, or the buying and selling of bankruptcy claims, is becoming an increasingly popular practice among creditors seeking immediate cash liquidity on an otherwise uncollectible account.
The duration of a Chapter 11 bankruptcy case can easily last two years or more from the petition date to the implementation of the court-confirmed Plan, making monetizing bankruptcy claims an attractive option for creditors who want to eliminate the risk of time delays awaiting case conclusion and payment distributions.
If you're a creditor in a bankruptcy case, selling your bankruptcy claim can provide you with immediate cash and eliminates the risks and uncertainties of waiting for a payout. Here are four benefits of selling your bankruptcy claims:
1. Secure a Definitive Recovery
As an unsecured creditor, you're at the bottom of the priority list for payouts from the bankruptcy estate. This means you may not receive anything, or only a small fraction of what you're owed, after accounting for administrative expenses and payouts to secured and priority creditors. Selling your claim ensures you'll receive a definitive recovery and avoid the risk of an uncertain outcome at the conclusion of the bankruptcy case.
2. Save Time and Money
Participating in a bankruptcy case can be a lengthy, grueling process that requires a significant amount of paperwork, correspondence, and legal representation. There may also be objections, complaints, litigation, or court hearings to attend. Selling your claim allows you to minimize the time, money, and resources you would spend on participating in the bankruptcy proceedings.
3. Eliminate Consideration Risk
Debtors may offer to pay creditors with promissory notes, equity in the reorganized company, or interests in creditor trusts. These forms of payment can be difficult, time-consuming, and expensive to liquidate into cash. Selling your claim eliminates the risk of receiving illiquid distributions or securities and provides you with cash instead.
4. Enjoy Tax Savings
Selling your bankruptcy claim can provide tax benefits, especially if you sell it for less than its original value. You can apply the loss on the uncollected portion of your receivable against your current income in your tax filings and enjoy immediate tax savings. This is an advantage that you won't get if you remain in the case and receive claim payouts from the debtor.
