Priya Ghodasara


Speculating on bad debt dates back to the 1790’s when investors purchased claims against the original thirteen colonies. While claims trading has become more streamlined, complex bankruptcies have elevated the financial risk of engaging in the process. Nonetheless, claims trading is undoubtedly a lucrative market, especially for those who are willing to master the art and take on the risk. The bankruptcy trustee’s avoiding powers have a tremendous impact on the claims trading market. In many of these cases the claim would have been disallowed in the hands in the hands of the original claimant, pursuant to the Trustee’s power to avoid preferential transfers and fraudulent conveyances. However, courts have been unclear whether claims that would have been disallowed in the hands of the transferor should also be disallowed in the hands of the subsequent transferee. A claim transferee’s worst nightmare is investing money in purchasing a claim and then finding the claim to be disallowed, leaving them with zero payment on their investment. KB Toys and Enron have created both clarity and confusion for claim traders.



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