Credit Bidding In Chapter 11 Bankruptcy

Technically speaking, a business in Chapter 11 bankruptcy cannot receive a discharge of their debts. However, there is a way that a bankruptcy debtor in this chapter can receive debt forgiveness from their creditors. One of the most common ways of doing this is the “credit bid.”  A credit bid is when a creditor purchases a property with their bankruptcy claim instead of paying cash.

For example:  A company files Chapter 11 bankruptcy and they have an industrial printing machine worth $10,000, secured by a loan of $15,000.  The bankruptcy debtor is unable to pay the creditor cash so they printing machine goes to auction.  The creditor holding the $15,000 lien has the right to bid on the property using only their $15,000 bankruptcy claim.  The benefit is twofold, 1) the creditor can get their property back if no one else bids higher than their $15,000 lien, 2) the debtor is released from the debt without spending cash and 3) the creditor avoids selling their asset at a depressed price which could impact the larger market depending on how many assets of that same type are auctioned.

However, this strategy may be a little less effective for the debtor if the property has equity in it. For example: If that same printing machine was worth $20,000 with a lien of $15,000 against it, allowing the creditor to “credit bid” at the bankruptcy auction could leave the debtor out of $5,000 if there are no higher bidders. And in many business bankruptcy cases, there is often only one bidder, the creditor.  In the end it is a tradeoff for the bankruptcy debtor, they may lose some equity in the credit bid; but they gain freedom from the debt after bankruptcy.

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