Despite a company's best efforts at credit screening, customers will occasionally end up in bankruptcy court. Though one may have a reasonable claim with an expectation of eventually being paid, it still may take well over a year for the customer to pay all claims, usually at pennies on the dollar. There is also a substantial risk of being paid in stock, which may be extremely difficult to convert into cash.
A reasonable alternative is to sell the claim to a third party for cash. The third party then pursues the claim, with the hope of eventually earning a good return on its investment. The third party may also have other reasons for making the purchase, such as gaining control over the customer by acquiring multiple credit claims, or by blocking any customer reorganization plans that it does not like. It may even resell the claim to yet another party.
The usual approach for selling a claim is for the company to first ensure that its claims are undisputed by the customer, which should establish to the claims purchaser’s satisfaction that the claim is genuine. The claims purchaser then estimates the proportion of the claim likely to be paid, and then discounts this amount based on the likely duration of the bankruptcy process before the claim is paid. If the creditor offers to sell its claims for an amount equal to or less than the discounted value calculated by the claims purchaser, then the deal will likely be completed.
The company then completes an assignment of claim agreement. The claims purchaser then files proof of the sale with the bankruptcy court, which in turn provides notice to the customer (who has a few weeks in which to object to the sale, which will then be decided during a bankruptcy court hearing). Barring any objection, the bankruptcy court then substitutes the buyer as the claim owner.
However, the terms of the assignment of claim agreement can be onerous in the extreme, such as requiring the company to repurchase its own claim from the claims purchaser, plus interest charges (which could be substantial, if the interest rate is exorbitant or the repurchase occurs many months after the original sale). The assignment may also stipulate that the claims purchaser only pays for undisputed creditor claims, rather than disputed claims that are later allowed by the bankruptcy court; this can result in a windfall profit for the claims purchaser. Also, many undercapitalized claims purchasers will attempt to delay payment. All of these terms should be closely examined and negotiated before agreeing to the assignment.