Let’s say you own a business that provides some type of service for a large company (you clean their offices, you cater their lunches, or whatever else you can imagine). Let’s say this particular customer spends $3000 a month with your company, and they have 30-45 days to pay. Suddenly, they get a little behind and after running the tab up to $4500, they file bankruptcy. Your immediate reaction might be, “Owe crap, I am out $4500.” The reality is, there is a good chance you will get paid at least something; you may not even have to wait that long.
The Tribune Bankruptcy
In 2008 Tribune Company (parent company of the Chicago Tribune, LA Times, the Chicago Cubs, WGN, and a whole bunch of other assets) filed for bankruptcy. My business was a creditor in the bankruptcy; my company was owed approximately $2000. Almost right away after the bankruptcy filing, I started receiving notices from different investment funds that were looking to buy my company’s creditor claim. These funds are pretty confident you will be paid some or all of your claim down the road; it might take a year or two, but they feel that you will eventually get paid at least something. Ultimately, I felt the claim was so small that I did not even want to fool with selling it. I decided to wait patiently and was paid the entire amount owed within a year. Not only that, I continued to do business with Tribune throughout that year and they paid their bi-monthly bills on time throughout that time. Not every bankruptcy goes that smoothly; in many cases, it will make sense to stop doing business with your bankrupt creditor, or at a minimum to require them to pay up front in cash. In the case of Tribune, they filed Chapter 11 bankruptcy (company reorganization) and the business itself was fundamentally profitable; they were just leveraged to their eyeballs in debt.
Who Buys Bankruptcy Claims?
A wide variety of hedge funds and other investment funds buy bankruptcy claims. For smaller claims, there are several smaller companies that target this niche. They seem to be focused on buying a large volume of claims and contact thousands of claimants through mass mailings. They subscribe to the US Bankruptcy Court’s PACER system and track legal filings to see which creditors they need to contact. Someone with a bankruptcy claim is not generally going to be aware of any of these companies. None have brand name recognition and they are somewhat difficult to find, even through search engines. Some of the companies include: Pioneer Funding, ETG Capital, Claims Recovery Group, and Hain Capital Group. Keep in mind they all want to earn a profit on the claim. So they will offer you less money now than they think you would eventually be paid in the future.
How Can Someone Invest in this Niche?
For the individual investor wishing to invest in bankruptcy claims, they probably are a few different angles. Let’s say you knew someone who had a bankruptcy claim against a corporate creditor that you were somewhat confident in. By reviewing and confirming other offers they had received, you could gravy train on the due diligence of other experienced buyers in order to offer the creditor a slightly better deal. You could loan money to someone with the bankruptcy claim as collateral. If you were confident in making offers on your own, you could buy someone’s bankruptcy claim quickly for cash, then immediately sell the claim for more more money to one of the other bankruptcy claim buyers that could not move as quickly as you.