What Are the Risks in Selling and Buying Judgments?
Judgment trading involves buying and selling judgments against an often litigious debtor.
Creditors may not want to speculate on the outcome of collections, wait for the lengthy judgment enforcement process to run its course, or they may need to raise cash quickly. In such situations, they have the option to sell to a judgment buyer. These buyers are typically judgment enforcement professionals who specialize in distressed debt.
Recovery risk refers to the possibility that the creditor will receive lower payments than expected. This can occur if the debtor’s assets are worth less than projected, other claims have seniority, the debtor declares bankruptcy, or the process takes longer and costs more than anticipated. That’s part of why selling to a judgment buyer is a viable option for some liquidity.
Overall, recovery risk is a critical factor to consider in judgment collection, as it can significantly impact the amount of money creditors ultimately receive from the debtor.
Notional amount risk refers to the creditor will receive less than the judgment amount. This can happen if the debtor finds a reason to avoid paying the judgment or negotiates a settlement with the creditor. Debtors can often find a small mistake made by a creditor and exploit it to avoid paying a judgment. Judgments enforcement requires close attention to detail and a mistake by a creditor can invalidate an otherwise valuable judgment.
Judgment bankruptcy claim is deemed partially or entirely invalid, or if any previous bankruptcy claim holder’s issues or disabilities are applied to reject the claim. The claims resolution process, which generally occurs after the confirmation of the reorganization plan, involves reviewing and challenging bankruptcy claims based on various grounds, potentially leading to negotiations or legal disputes.
Bankruptcy risk is the third risk factor in trading judgments. Depending on where the debtor lives they can protect $300,000 to $700,000 in real estate equity plus additional personal property. Bankruptcy also can require time-consuming and expensive litigation for the creditor. It will also significantly delay any collection should a portion of a judgment survive the bankruptcy process.
The market for selling judgments will remain strong as sellers seek to expedite their recovery, while buyers speculate on case outcomes. If you intend to sell a judgment, consider all your options and conduct thorough due diligence.