The motivations on each side of claims sales are different, but complementary. The seller either needs money immediately to pay bills, wants to write off his losses for tax purposes, or believes he can get a bigger return by investing the money elsewhere. The buyer, meanwhile, bets that the value eventually returned to the creditors will exceed the amount they paid for the receivables.
Claim sales usually take place behind closed doors between financial institutions. But in recent years, public marketplaces for bankruptcy claims, such as Xclaim and Claims Market, have sprung up, bringing a degree of transparency to what was an opaque market and allowing almost anyone with a claim to list it.
“We empower people to make a choice they otherwise wouldn’t have,” said Matthew Sedigh, founder of Xclaim.
The growth of these marketplaces has been catalyzed in no small part by bankruptcies in the crypto sector. According to estimates from Open Exchange and Xclaim, between $20 billion and $30 billion is currently tied up in crypto foreclosures.
At the end of 2022, Xclaim turned to focus exclusively on crypto bankruptcies. Since then, the marketplace, which had more than $200 million in claims in January, has attracted more users and generated more revenue than the previous two years combined, Sedigh says.
Buying claims in crypto bankruptcy is seen as a way to invest in crypto at a discount. While each creditor’s claim is valued in dollars at the date of the bankruptcy filing, not crypto, the balance sheets of these companies largely consist of crypto assets. Therefore, if crypto increased in price, claim holders would receive a greater return. In the case of Mt. In fact, Gox has ruled in court that claim holders must fully share in the surge in crypto prices, meaning they are poised to earn more than 100 percent returns on their claims when the redistribution begins on October 31.
Buying claims isn’t for the faint-hearted, though, says Thomas Braziel, founder of 507 Capital, an investment firm specializing in distressed debt, which has a large position in the bankruptcy of Mt. Gox and others. Not only do creditors sometimes misrepresent the value of their claims, intentionally or otherwise — some people “cheat the edges,” says Braziel — but some claims turn out to be completely fraudulent.
In other cases, a buyer may find that a claim is subject to chargebacks because the original holder made secret recordings shortly before bankruptcy, eating up whatever profit he hoped to make. In foreclosures, funds withdrawn in the 90 days prior to a filing are later withdrawn back into the estate, to avoid a scenario where a minority of creditors are rewarded for pulling the trigger more quickly.
For these reasons, says Muhammed Yesilhark, chief investment officer at asset manager NOIA Capital, thorough due diligence is vital. “If we can’t find three or four people in the industry to vouch for the seller, we’re not in it. We don’t touch anything that smells even remotely,” he says. “It’s not like buying toilet paper on Amazon.”
