The motivations on each side of claim sales are different, but complementary. The seller either needs immediate cash to meet bills, wants to write down their losses for tax purposes, or believes they can earn a greater return by investing the money elsewhere. The buyer, meanwhile, is wagering that the value eventually returned to creditors will exceed the amount they paid for the claims.
Claim sales have typically happened behind closed doors, taking place between financial institutions. But over the past few years, public marketplaces for bankruptcy claims, such as Xclaim and Claims Market, have emerged, bringing a degree of transparency to what was an opaque market and allowing almost anyone with a claim to list it.
“We’re giving people the power to make a choice they otherwise wouldn’t have,” Matthew Sedigh, founder of Xclaim, says.
The growth of these marketplaces has been catalyzed in no small part by bankruptcies in the crypto sector. Between $20 billion and $30 billion is currently locked up in crypto bankruptcies, according to estimates from Open Exchange and Xclaim.
In late 2022, Xclaim pivoted to focus exclusively on crypto bankruptcies. Since then, the marketplace, which by January had listed more than $200 million in total claims, has attracted more users and drawn in greater revenue than in the two previous years combined, Sedigh says.
Buying claims in crypto bankruptcies is seen as a way to invest in crypto at a discount. Although each creditor’s claim is valued in dollars on the date of the bankruptcy filing, not denominated in crypto, the balance sheets of these firms are made up largely of crypto assets. Therefore, if crypto were to appreciate in price, claim holders would receive a greater return. In the case of Mt. Gox, the judge even decided that claim holders should share fully in the rise in crypto prices, meaning they are set to make a return of over 100 percent on their claims when redistribution begins on October 31.
However, purchasing claims is not for the faint of heart, says Thomas Braziel, founder of 507 Capital, an investment company that specializes in distressed debt, which holds a large position in the Mt. Gox bankruptcy and others. Not only do creditors sometimes misrepresent the value of their claims, intentionally or otherwise—some people “fib around the edges,” says Braziel—but some claims turn out to be entirely fraudulent.
In other instances, a buyer might discover that a claim is subject to clawbacks, because the original holder made undisclosed withdrawals shortly before the bankruptcy, eating into any profit they might hope to make. In bankruptcies, funds withdrawn in the 90 days before a filing are later pulled back into the estate, to avoid a scenario in which a minority of creditors are rewarded for being faster on the trigger.
For these reasons, says Muhammed Yesilhark, chief investment officer at asset management company 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 don’t get involved. Anything that is remotely smelly, we don’t touch,” he says. “It’s not like buying toilet paper on Amazon.”