Buying Distressed Assets, Claims, and Securities: Why Distress Creates Opportunity

Distress in the market isn’t always a sign to run away. Sometimes it’s the clearest sign to lean in. When industries such as real estate, retail, healthcare, restaurants, or automotive struggle, assets often become available at a fraction of their prior value. These periods create breathing room and opportunity for buyers willing to navigate the legal and financial landscape of distressed acquisitions.

As Peter Amend of Alston & Bird puts it, “Distressed assets can present opportunities to buy low and sell high, if you understand the risks and can move quickly.”

When done well, distressed investing lets buyers capture value, repurpose underperforming businesses, or gain strategic footholds they could not afford in normal markets.

Understanding Capital Structure

Before diving into distressed buying, it’s essential to understand a company’s capital structure, because this determines who gets paid, when, and how much.

A typical capital structure includes:

• Senior secured debt
• Junior or mezzanine secured debt
• Unsecured notes
• Trade debt
• Equity

In distress, the value of the business often falls below the total amount owed to creditors. Somewhere along that capital structure is what restructuring professionals call the ‘fulcrum security,’ i.e., the class of debt or equity at which the value of the enterprise ‘runs out.’

“The fulcrum security is simply the point in the capital structure where recovery stops. Whoever holds that piece usually controls the restructuring, ” explains Jonathan Friedland of Much Shelist.

Understanding where this fulcrum sits allows buyers to design strategies such as ‘loan-to-own,’ which is purchasing debt at a discount to gain control during a restructuring.

Where Distressed Opportunities Come From

Distressed opportunities generally arise from either within a bankruptcy or outside of it.

Bankruptcy is one of the most structured and predictable ways to purchase distressed assets.

As Richard Corbi of the Law Offices of Richard J. Corbi notes, “A bankruptcy court order gives buyers comfort because everyone with an interest gets notice and a chance to object. This cleanses the sale and reduces the risk of future challenge.”

Options to purchase distressed assets within the bankruptcy process include:

• Section 363 asset sales
• Chapter 11 reorganization transactions
• Chapter 7 trustee sales

Section 363 sales are the most well-known. They allow the court to approve a transfer of assets ‘free and clear’ of most liens and claims. This is why these sales are attractive; the buyer takes what they want and generally leaves the rest behind.

However, not all distressed buying happens as part of the bankruptcy process. Common options for purchasing distressed assets outside of the bankruptcy process include:

• Out-of-court workouts
• Assignments for the benefit of creditors (ABCs)
• Article 9 secured-party sales
• State or federal receivership sales

These paths can be quicker and more private but come with downsides, primarily that buyers cannot rely on the clarity around old liabilities that comes from the bankruptcy process.

Due to the greater risk of purchasing distressed assets outside of bankruptcy and the thorough diligence required, buyers new to the space are advised to start small and build experience gradually.

Distressed Asset Buying Strategies

Buyers of distressed assets can deploy several strategies, depending on where the value sits and how quickly they need to act.

Common strategies include:

• Loan-to-Own: Here, a buyer purchases a secured lender’s debt at a discount with the goal of credit bidding it later. This can produce enormous returns because the buyer acquires control for far less than the original loan value.
• Cross-Conditional Tender Offers: In some cases, buyers make simultaneous offers to purchase debt at a discount and equity at a nominal amount. These moves avoid prolonged restructuring and create a clean capital structure.
• PIPE or 2nd-Lien Investments: Sometimes the best strategy is to invest in a second-lien tranche or PIPE (private investment in public equity), gaining influence without taking full control, yet.
• Buying the Fulcrum Security: If a company is deeply distressed, the fulcrum may be trading far below par. Building a blocking position gives the buyer control over restructuring negotiations and the ability to convert debt into equity.
• Section 363 Sales and Plan Sponsorship: These are high-transparency processes in which the buyer either becomes the stalking horse bidder or sponsors a reorganization plan. Though competitive and complex, these approaches offer strong legal protections.

A typical 363 sale includes (1) negotiating a stalking horse bid, (2) court approval of bidding procedures, (3) a marketing and auction period, (4) a competitive auction, (5) a sale hearing and court order, and (6) a closing, often immediately afterward.

Stalking horse bidders receive protections such as break-up fees and expense reimbursement. They also get more time for diligence and can set favorable terms that competitors must match or exceed.

Thaddeus D. Wilson of King & Spalding LLP cautions buyers, however, that “courts will not approve a sale that benefits only the senior lender or buyer without leaving something for other stakeholders.”

Understanding Claims Trading

Distressed investors often buy bankruptcy claims from trade creditors, suppliers, landlords, or bondholders. These claims may be purchased at significant discounts and later paid out when the debtor confirms a plan.

But claim buyers face risks, including:

• Disallowance under Section 502(d)
• Equitable subordination
• Anti-assignment provisions

Still, claims trading remains a common way to build influence in a case.

Key Risks Buyers Must Consider

Fraudulent Transfer

One of the biggest fears for any buyer is that creditors later argue the deal was a ‘fraudulent transfer,’ that the seller sold assets too cheaply while insolvent. If successful, a court can unwind the transfer, putting the buyer in a catastrophic position.

Best practices to mitigate fraudulent transfer risk include:

• Running lien and title searches
• Getting an independent valuation
• Using representations and warranties
• Negotiating indemnities
• Holding part of the purchase price in escrow

Courts look closely at fairness and process. A properly run sale is rarely unwound.

Successor Liability

Certain liabilities may follow assets even when buyers try to leave them behind. These include:

• Union and collective-bargaining obligations
• Pension withdrawal liability
• Certain environmental liabilities
• Product liability claims

“But successor liability claims,” according to Friedland, “can be far more nuanced than these situations mentioned above.” He explains that “it can also apply in contexts where third parties do not know that the acquired business is under new ownership and when such new ownership includes some of the owners of the acquired business.” Friedland also notes, however, that “it is relatively straightforward to structure a transaction in a way that provides a very strong defense against such a claim.”

This is why buyers often prefer bankruptcy, where courts can limit successor liability more confidently than in out-of-court settings.

Finding Opportunity in Distress

Purchasing distressed acquisitions is not about preying on weaknesses, but about seizing opportunities that arise when markets shift. Buyers who understand capital structure, legal risk, and deal strategy can acquire valuable businesses, intellectual property, real estate, or contractual rights at meaningful discounts. In short, buyers who know the process stand to unlock substantial value.

Buying distressed assets requires both caution and decisiveness. The best opportunities go to buyers who are prepared. The following are practical suggestions for those considering entering the distressed asset world:

• Start with small or straightforward deals.
• Develop strong relationships with bankruptcy professionals.
• Read public filings and sale notices.
• Do not skip diligence, especially around liens, contracts, and environmental issues.
• Understand that speed matters; distressed deals move fast.

This article was originally published on February 10, 2026 here.