Bankruptcy Claims Trading: Mechanics, Strategies, and Ethics

Introduction

Claims trading is a process by which Chapter 11 bankruptcy claims are sold to third party buyers. The purposes of these transactions are to minimize payment risk for the selling creditors, and to purse reward opportunities for buyers through either direct financial benefit or for more strategic bankruptcy purposes. The trading market in bankruptcy claims was less than $10 billion in 1990, but grew to more than $20 billion by the year 2007, and by 2010, some estimates placed the market volume as high as in the hundreds of billions of dollars. Much of this increased market activity has occurred as a result of reduced judicial intervention in the trade and lack of regulation. See II(B)2, infra.

While the rules and processes governing claims trading themselves are rather straight-forward, there are still some issues to be concerned with. Those issues and the ethical dilemmas they pose are best understood by first understanding the mechanics of claims trading and the motivations of the parties to those transactions.