Accounting Best Practices, Fifth Edition

7–9. Sell Your Bankruptcy Creditor Claim

Despite a company’s best efforts at credit screening, customers will occasionally end up in bankruptcy court. Though one may have a reasonable claim with an expectation of eventually being paid, it still may take well over a year for the customer to pay all claims, usually at pennies on the dollar.

A reasonable alternative is to sell the claim to a third party for cash. The third party then pursues the claim, with the hope of eventually earning a good return on its investment. The usual approach is for a potential purchaser to estimate the proportion of the claim likely to be paid, and then discount this amount based on the likely duration of the bankruptcy process before the claim is paid. If the creditor offers to sell its claims for an amount equal to or less than the discounted value calculated by the purchaser, then the deal will likely be completed. Claims purchasers also acquire multiple creditor claims in order to have greater control over approval of the bankrupt company’s workout plan, potentially increasing the potential payout to the claims purchaser.

A reputable claims purchaser will not acquire a claim unless the company has first perfected its status as a creditor with the bankruptcy court. This establishes to the purchaser’s satisfaction that the claim is genuine, and greatly increases the value of the claim to the purchaser.

Alternatively, if the bankruptcy process is likely to be a short one, the company may earn more by ...