Secondary Market for Buying and Selling Chapter 11 and Chapter 7 Bankruptcy Claims - Trade Claims, Administrative Claims, Unsecured Claims and 363 Sales Data

Bankruptcy Claims

Market Description (Continued)

Bankruptcy Claims Market

A “bankruptcy claim” is generally defined as any right to payment held by creditors against a bankrupt debtor. A claim also vests its holder with the right to be heard in a bankruptcy case and, generally, the right to vote in favor of or in opposition to a plan of reorganization. These claims include secured and unsecured debt, bank loans, and a variety of contractual obligations and company payables. A “trade claim” is any unsecured claim against a company that has filed for bankruptcy protection. They are mainly debts owed to trade vendors, but may also include claims by landlords, lawyers, leasing companies, unions, and individual employees of the debtor. These claims can range in value from a few hundred dollars to several hundred million dollars. Trade claims are a fungible commodity in the sense that all claims with the same priority get paid out at the same rate by the bankruptcy estate. Generally speaking, trade claim holders have the same payout status as unsecured loan and bondholders in a bankruptcy case.

The bankruptcy claims market is estimated to be a $500+ billion marketplace ($1+ trillion including Lehman Brothers), of which nearly $300 billion consists of general unsecured claims. However, only a fraction of that market has traded historically, which is usually concentrated in the largest bankruptcy cases. According to SecondMarket analysis, during the 12 months between January and December 2008, under $2.0 billion in unsecured claims changed hands, or less than 5% of the estimated market.

In addition, corporate bankruptcies are on the rise. In the first three quarters of 2008 there were 29,960 business bankruptcy filings in the U.S., versus 19,727 and 14,228 in the same 9 month periods in 2007 and 2006, respectively. With a slowing economy, the credit crunch, and difficult financial markets, companies have struggled to stay afloat, and the number of bankruptcies has been increasing accordingly. Industry experts expect these upward trends to continue and to result in a large increase in 2009 filings compared to 2008, which should continue to drive an increase in bankruptcy claim volume.

Bankruptcy Types

There are six types of bankruptcy in the United States, named for their respective chapters in the United States Bankruptcy Code. The type of bankruptcy that one files depends on several factors, including whether the filer is an individual or corporation, for example, and whether or not the filing was voluntary. The vast majority of corporate bankruptcy cases, and therefore claims which SecondMarket tracks and facilitates transactions in, arise from Chapter 11 bankruptcy cases as corporations try to re-organize and emerge as a going concern. Due to soaring budget deficits and plunging fiscal revenues, it is quite possible that we will see a spike in municipal (Chapter 9) cases and related claims as well. Futhermore, with the high cost of DIP financing and exit financing, we may see far more liquidations than in recent years. Here are the six bankruptcy types, for your reference:

Chapter 7 – Individual and Business Liquidation: In Chapter 7 bankruptcy, a person or business surrenders their property to a bankruptcy trustee, who liquidates the assets and returns the proceeds to creditors. In this bankruptcy, the debtor ceases payments immediately upon filing, and all debts are then cleared.

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