Bankruptcy Trends

Overall, does claims trading help or hinder the chapter 11 process? Should additional disclosures be required?  

For years, creditors unwilling to take the time (or risk) to wait for payments from a bankrupt company have been able to sell their claims to distressed investors. But as the secondary market has grown, so have questions about the practice.

Distressed investors have long jumped at the chance to pay pennies on the dollar to acquire a claim that they are betting will pay out at a much higher rate. They say they provide a service to the creditors, often vendors and suppliers, by giving them a quick and certain payout in an inherently uncertain situation.

When a community hospital closes or is sold to a for-profit operator, there is a loss to the community. Despite protestations by for-profit operators, a community loses something of value by the conversion of a nonprofit hospital to a for-profit hospital. The mission statements are different. The question is how the loss gets valued and whether the community is compensated for the loss.

A New York Times article published in October discusses how litigation financing may warp the legal system. The author posits that litigation finance gives rise to a litigation arms race, with speculative money aggravating the already-high costs of the American legal system. The article says: “It’s hard to imagine how billions in outside capital won’t end up changing the justice system. The only question is how.”