The market for trading bankruptcy claims is highly liquid and sophisticated, exceeding well over $100 billion. This market, which promotes the efficient use of capital by matching claimholders with distressed investors, plays a significant role in most large Chapter 11 cases where claims purchasers are active participants in the reorganization process.
Purchasers of bankruptcy claims must consider many of the same risk factors as investors in other orderly markets. But unlike in other markets, additional bankruptcy-specific risk factors must be considered by market participants. These factors include, among others, the counterparties’ assessment of the time value of money and litigation, valuation, liquidity, disallowance, avoidance, and equitable subordination risks.
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