In the wake of FTX’s downfall and bankruptcy filing, more crypto companies are expected to file for bankruptcy.[1] With a tumultuous year in the crypto world, creditors have been left with billions of dollars worth of claims. Unfortunately, bankruptcy proceedings can take years to resolve, thus leaving a creditor in a state of limbo and waiting to learn what portion of its claim will be paid out. As a result of this uncertainty, creditors may wish to consider selling their claims.[2] By selling a claim, a creditor can receive an upfront payment for the claim instead of monitoring the debtor’s bankruptcy case for years. Reconciling and distributing claims in the bankruptcy process is notoriously slow, particularly for very large debtors such as FTX.

Unlike stocks, bankruptcy claims are not sold or traded on the New York Stock Exchange. Instead, creditors must sell their claims through individually negotiated assignment agreements.[3] While there are no standardized forms for claim assignments, creditors tend to use assignment agreements that contain universally accepted terms in addition to negotiating the details, such as whether the buyer can force the creditor to repurchase the claim. Conveniently, creditors do not need to disclose the purchase price or other details of the assignment in the bankruptcy process.

While the prospect of quickly monetizing a claim may be enticing to a creditor, a creditor should consult an attorney to ensure that risks, such as the purchase price being returned to the buyer if the claim’s validity is questioned, are considered and mitigated. We are confident a market for FTX bankruptcy claims will emerge over the next 60 days.

[1] MacKenzie Sigalos and Rohan Goswami, Crypto firm BlockFi files for bankruptcy as FTX fallout spreads, CNBC (Nov. 28, 2022), https://www.cnbc.com/2022/11/28/blockfi-files-for-bankruptcy-as-ftx-fallout-spreads.html.

[2] Bruce S. Nathan and Scott Cargill, A Primer on Selling Bankruptcy Trade Claims, Business Credit (Feb. 2021), https://www.lowenstein.com/media/6418/nathanpluscargill-a-primer-on-selling-bankruptcy-trade-claims-business-credit-22021.pdf.

[3] Bankruptcy Claims Trading: What is it? How do I maximize my returns?, Nossaman (Mar. 25, 2010), https://www.nossaman.com/newsroom-insights-bankruptcy-claims-trading-what-how-do-i.

Tags: Bankruptcy, Joseph Pastore, Tyler Rutherford