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- 1. What You Should Consider Before Selling Your Bankruptcy Claim! Presented by: Philip P. Philbin CCE Managing Director and Senior Consultant Commercial Credit Management Associates www.commercialcreditmanagementassociates.com
Hinweis der Redaktion
- Good Day everyone and thank you very much for registering for this Webinar. I would like to take a minute to express my thanks to Lillian of the NACM Midwest, and Jodi Owens and Debbie Mendoza of the Credit management association for their help in making this webinar possible. For me personally, it is most gratifying to present these educational webinars to my peers in the Finance and specifically the Credit & Collection Management profession. I created this webinar because I was concerned that many credit & collections professionals might never have heard of claims trading. This was confirmed when Jodi & Debbie had indicated to me that they had been in C&C for many years and never had any idea of what claims trading was all about. Here is what you will take away from this webinar; An understanding of who and what claims traders are and the purpose for their existence How your company, as an unsecured credit in a Chapter 11 bankruptcy case can actually get a recovery, how to maximize the recovery amount, and get your money fast How to protect your company against potential claims against your company due to error you may encounter with Claims Traders.
- Here’s a startling number reported by Reuters… “Per day, 376 companies sought protection from creditors in bankruptcy count for May 2009. There were 7,514 commercial bankruptcies In May 2009, with only 5,354 from May 2008, per AACER (automated access to court electronics records). In two years, the number of businesses filing for bankruptcy in May has more than doubled. More filings are expected throughout 2009 and well into 2010. It is important to understand from the start that claims trading happens primarily on Chap 11 bankruptcies. It does not often occur on Chapter 7 or Chap 13 or any other bankruptcy types. Not covered in the webinar are the detailed details of these various types of bankruptcies. Those are covered under another webinar. Briefly, there are two forms of bankruptcy; Liquidations and Reorganization. Chap 7 governs liquidation of an individual or corporation debtor’s assets. Chap 13 governs individual reorganizations, which allow the debtor to make payments to creditors in a court-approved payment plan where they are able to retain their assets. There are generally not enough assets in a Chap 7 bankruptcy or Chap 13 case to warrant trading claims although it is possible. In Chap 7 cases, the assets are too quickly liquidated for creditors to think about trading claims. We will concentrate on Chap 11 bankruptcies in this webinar. Time to define a “bankruptcy claim”. A bankruptcy claim is defined as the amount of money due to your company at the time you receive the automatic stay from the bankruptcy court. This amount is also the amount you list on the proof of claim (POC) when requested or required to do so and is the basis for claims trading and any cash distribution that may occur from a bankruptcy proceeding. Later in this webinar we will discuss government regulations on trading claims but suffice it to say that it is a very lucrative for those bankruptcy experts and their financial backers and is very loosely regulated.
- Creditors’ claims are important in bankruptcy law since only "claims" can be discharged, and only "claimants" with "claims" can vote on a plan of reorganization in a Chapter 11 case. Also, the particular type of the claim often determines whether the creditor will receive a distribution and the amount of that distribution. In a typical Chapter 11 case, claims are divided into secured and unsecured claims,and the unsecured claims are often divided further based on the type of claim. Secured claims generally receive priority in payment over unsecured claims in any distribution plan, while the unsecured claims are again prioritized so that administrative expense claims (including certain professional fees and expenses, certain employee wage and benefit claims, certain tax claims and claims of creditors providing post-petition credit to the debtor) usually take priority over pre-petition general unsecured creditors. Accordingly, creditors who are considering selling their claims, as well as buyers who are considering buying claims, must be aware of the relative priorities among secured and unsecured claims. A debtor is usually responsible for identifying the name, amount and designation of aCreditor’s claim on the debtor’s Schedule of Assets and Liabilities, which is filed as part of the initial bankruptcy proceeding. However, a proof of claim should also be filed by all creditors to dispute or supplement what the debtor has filed. A creditor’s proof of claim is normally filed by the creditor on an official bankruptcy form and sets out the amount due and the proper name and address of the creditor. Filing a proof of claim is required in a Chapter 7 case in order to receive distributions. Filing a proof of claim is not required in Chapter 11 cases if the claim is properly listed on the debtor’s schedules. Nevertheless, if the claim is listed incorrectly, or as disputed, contingent or unliquidated, the creditor must file a proof of claim or run the risk of the court accepting the debtor’s designation, which in some cases may result in loss of voting and distribution rights. The time to file a proof of claim is determined by the court in Chapter 9 and 11 cases, and is required to be filed within 90 days after the first scheduled meeting of creditors in a Chapter 7 case.
- See Agreements Underlying Sales of Claims The Offer; be patient. Do not just jump at the first offer you get. As the bankruptcy proceeding progress, generally the offers get better and better.
- Creditors may choose to sell their claims at a discount. Simply put, for many of these creditors, it is better to recover thirty ($.30) to sixty($.60) cents on the dollar today (for example), rather than risk entering bankruptcy themselves by holding out for a better return in the future. Thus, selling bankruptcy claims offers the seller an opportunity to turn a claim that otherwise might not be satisfied for many years, into liquid assets. Another common motivation for an unsecured creditor to sell its bankruptcy claim is the intimidation surrounding the bankruptcy itself. When a creditor becomes aware that a debtor has filed a Chapter 11 bankruptcy petition, many panic and sell their claim to the first willing buyer. These sellers fail to research the potential recovery value of the debt they are selling. They enter the claims market with a willingness to take far less than their claim may ultimately be worth. On the other hand, other claim sellers enter the market after careful research and thorough reflection. These sellers have weighed the risks and potential benefits, and have simply decided that they would be better off by selling the debt, obtaining cash immediately, and learning from the experience.
- Although companies and individuals sometimes purchase bankruptcy claims directly from creditors, more commonly brokers and traders act as middlemen in the transaction. Generally, these middlemen maintain a network of potential investors, and search bankruptcy court dockets for potential sellers. Their usual commission is .5% to 1% of the total value of the transaction. Brokers and traders sometimes package claims into units ranging in value from as low as U.S. $30,000 to as high as millions of dollars. These packaged claims can be comprised of a single claim or a mixture of claims from several different bankruptcy filings. By mixing claims, high and low risk claims can be blended and packaged in a proportion that is attractive to potential investors. As set forth below, claims investors can be sorted into two (2) principal groups; passive investors and active investors. In its simplest form, purchasing bankruptcy claims can be a fairly straightforward endeavor. Using this approach, an investor researches the expected value of the claim at the end of the Chapter 11 bankruptcy and the expected duration of the bankruptcy process—thereby leading to a discounted present value analysis. The investor then compares the seller’s offering price against the claim’s projected final value at the end of the bankruptcy process. If the return is large enough, and the duration of the bankruptcy is not too long, then the investor purchases the claim and waits for the debtor to work its way out of the bankruptcy. This passive approach, however, is not commonly used by most investors because the return on their investment is dependent upon too many variables beyond the investor's control. Though bankruptcy can be a smooth process, unforeseeable time delays can destroy an investor’s return. In addition, the potential for proactive maneuvering on the part of other creditors makes it extremely difficult to determine at the outset what the final value of the claim will be. Therefore, most investors who choose to enter the bankruptcy claims market prefer to take an active role in shaping the bankruptcy process. One way investors can increase the return on their investment is to attempt to take an active role in the reorganization process and support a reorganization plan that maximizes the value of their claim. Though the incumbent management of a bankrupt company initially maintains control through the "exclusivity periods," ultimately the right to file a reorganization plan (and, thus, control the timing and amount of payments to creditors) may be made available to any claim-holder who proposes an alternate plan.The reorganization plan specifies what payments (and the time period for said payments) proposed to holders of secured and unsecured claims, and contains a road map, including projections, of the debtor's future operations. Often sophisticated claims investors buy groups of claims in a single bankruptcy case. This consolidation of claims increases the buyer's leverage in negotiations regarding the debtor’s plan of reorganization. Another factor that motivates active investors is the expectation that in cases where unsecured claims will not be paid in full, these unsecured claims will be converted into stock in the reorganized debtor. Therefore, by purchasing a large block of the outstanding claims, an investor may have the opportunity to position itself to become a controlling or influential shareholder once the reorganization plan is approved.
- The first time I received an offer to purchase my bankruptcy claim, I thought that is was some kinda scam and tossed it out. I had never heard of such a thing and dismissed it as junk mail. The thing to keep in mind is that these traders have very deep pockets meaning that the people that are backing their play invest there monies for a living and have the utmost confidence in their traders experience. Make no mistake…..these traders are bankruptcy experts and specifically Chap 11 bankruptcy experts. They have been buying claims for over 2 decades and are well versed in all aspects of the buying processes. The traders main goal is to insure that their backer’s investment will turn a profit.
- Stocks, bonds etc.
- It is important to note that the trading of bankruptcy claims is not explicitly regulated by the Bankruptcy Code. Although there are some general provisions in the Bankruptcy Code that apply to claims trading, the process is largely governed through more general legal principles. Accordingly, its is essential for both buyers and sellers to retain competent professionals who understand the process and procedure of trading bankruptcy claims. Bankruptcy Rule 3001(e) governs the mechanics of claims trading. If those procedures are followed, the rights held by the original claim-holder are transferred to the investor who purchases the claim. These rights transfer as if the investor had paid the full face value for the claim, even if the actual purchase price was substantially discounted from the face value. Because the claim assigned is subject to any defenses/set-offs available to the debtor against the transferor, claims trading must be undertaken with detailed knowledge of the debtor’s potential rights and defenses against the selling creditor.
- In other words, if a claim is highly contested by the debtor, a creditor can easily be on the hook for big money in attorney’s fees.
- Trading in bankruptcy claims can be a profitable venture for both the buyer and seller of the claim. The pitfalls that do exist can generally be circumvented by knowledgeable business people and professionals. As a result, by understanding the bankruptcy process, what has traditionally been seen as a business "disaster" can be converted to a business "opportunity" for the intelligent buyer, seller or investor.