Under Section 363 of the Bankruptcy Code, interested parties are authorized to buy assets in bankruptcy. By doing so, the purchaser is able to acquire the asset “free and clear,” which means any liens or judgements against the asset are not transferred to the asset (and the party purchasing the asset).

This gives would-be buyers opportunities to acquire valuable assets at a steep discount, but there is a process that must be followed to ensure the transaction is completed in accordance with Section 363.

Few assets are off the table if you’re purchasing them during bankruptcy. What is on sale is a matter of discussion between the debtor company (or individual), the court-appointed bankruptcy trustee and the interested third-party buyer. In general, though, all of the following can be sold or purchased free and clear through bankruptcy:

In some cases, buyers can even purchase judgements levied against the debtor company, gaining legal grounds to seek repayment from the debtor company.

Typically, it’s difficult (or outright impossible) to buy assets in bankruptcy due to the presence of liens or judgements against the assets. Tax liens, first liens, second liens and so on determine the priority in which creditors are paid back, should the asset be liquidated. This means if the asset is sold, the liens would then become the responsibility of the new owner, entangling them with creditors they would otherwise rather not deal with.

Instead, third party buyers typically seek a free and clear transaction by leveraging Section 363 of the Bankruptcy Code. Here’s how such a sale under Section 363 would typically proceed:

In addition to seeking a stalking horse, the debtor may also start the selling process before filing bankruptcy to ensure the 363-process can be completed quickly.

To do so, the debtor and their trustee will file a motion with the bankruptcy court. This motion will seek approval for the bidding process, along with the deadlines for the auction and following sale. If no stalking horse bidder is present at this time, one may be selected to start the process.

Another hearing will be scheduled once a buyer is identified for the final transaction. At this hearing, the debtor must provide evidence that the selected buyer provided the best or highest bid, and that the auction process is completed without interference from the debtor.

Once the court approves the sale, it can be performed free and clear, so the buyer walks away with a no-strings-attached asset, and the funds raised from the sale are then used to satisfy the debtor’s creditors.

Underpinning every asset purchase in bankruptcy is the pursuit of a good deal. As assets sold in bankruptcy tend to be sold under tight deadlines, debtors are encouraged to liquidate those assets as efficiently as possible to satisfy creditors. As debtors do not have time to perform an extended buyer search, assets are typically sold at a deep discount.

For the buyers, discounted assets can serve strategic or investment needs, including:

Buying assets in bankruptcy offers obvious advantages to the buyer, but it must be done in accordance with the Bankruptcy Code to ensure there are no lien-related complications.

If you are looking to acquire assets at an advantage, purchasing them in bankruptcy is an option. However, given the complexities, it is recommended that would-be buyers first consult with an experienced bankruptcy attorney. Their expertise will ensure the transaction is completed in accordance with Section 363, and can also help with vital parts of the process, such as due diligence and asset valuation.