If you're a creditor holding a bankruptcy claim but need immediate liquidity, selling your claim on the secondary market is an option. Claim buyers (hedge funds, distressed investors, trading firms) often purchase claims at a discount to face value. Here's how to execute a sale.
Why Sell Your Claim?
Reasons creditors sell claims:
- Need immediate cash flow for operations
- Avoid tying up capital in a multi-year bankruptcy process
- Uncertainty about the case outcome (reduce risk)
- Want to exit without managing ongoing litigation
Step 1: Determine Your Asking Price
Use the valuation framework we discussed earlier:
Asking Price = Face Amount × Recovery Rate × Discount Factor
Start with an optimistic valuation (you want high price). For example:
- Claim: $100,000
- Estimated recovery: 50%
- Timeline: 2 years, 15% annual discount
- Your valuation: $100,000 × 0.50 × 0.70 = $35,000
- Ask: $35,000–$40,000 (optimistic end of range)
Step 2: Market the Claim
Buyers won't come to you. You need to reach out:
Contact Known Claims Traders
Large law firms that represent many creditors in bankruptcy cases know claim buyers. Ask your attorney or the trustee for referrals to claim trading firms or hedge funds.
Use Claim Trading Platforms
Post listings on available platforms (some charge small fees) or bulletin boards where claim buyers actively look.
Direct Outreach
If you know of claims traders or distressed hedge funds, contact them directly with a brief summary of your claim (case name, debtor, claim amount, priority, and estimated recovery).
Step 3: Negotiate Terms
When a potential buyer appears, negotiate:
Price
The buyer will offer low (conservative estimate). You ask high. Settle somewhere in the middle. Be prepared to justify your recovery assumptions with court documents, financial statements, and market comparables.
Timing
Some buyers will pay slightly more if you can close quickly (30 days or less). If you need speed, accept a lower price. If you have time, hold out for better terms.
Representations and Warranties
The buyer will ask you to warrant that your claim is valid, undisputed, and has no hidden legal issues. If your claim is strong, this is easy. If it's disputed, expect a lower price or special indemnification terms.
Step 4: Document the Sale
Use a claim purchase agreement (sometimes called an assignment agreement). The agreement should specify:
- Debtor name, case number, and bankruptcy court
- Your claim amount and claim number (from the docket)
- The purchase price and payment method
- Your representations (claim is valid, undisputed, no liens, etc.)
- Indemnification if the claim is later challenged
- Effective date of assignment
Have a lawyer review the agreement before signing. A short legal review ($500–$2,000) is worth the protection.
Step 5: Assign the Claim in Court
Once you've signed the purchase agreement and received payment, the buyer needs to formally take over your claim. File an assignment with the bankruptcy court. The process varies by court, but typically:
- You and the buyer sign a formal assignment document
- File it with the court (or serve it on the trustee)
- Provide notice to interested parties (the debtor, trustee, other claimants)
Once assigned, the buyer receives all future distributions and communications from the trustee.
Tax and Accounting Considerations
When you sell a claim, you may realize a gain or loss:
- Gain: If you sell for more than you originally paid for the underlying debt
- Loss: If you sell for less (likely, since you'll sell at a discount to face value)
Consult a CPA or tax attorney to understand the tax implications of your sale. In many cases, losses on unsecured claims can offset other business income.