Credit bid

Credit bid: Using collateral to secure a property auctioned at a foreclosure sale.

Credit bid/bidding: Using the amount of the claim secured by the collateral being auctioned to bid in lieu of cash. Credit bidding reduces a mortgage lender’s need for cash during an auction, leaving a mortgage lender with discretion to accept a bid that is lower than the amount owed.

Credit Bid: Buying a Home Without Cash

The right of a secured creditor to credit bid enables them to compete with cash bids in foreclosure sale to ensure that the creditor’s collateral is not sold for less than the secured creditor believes it is worth.

While some say credit bidding blocks bidding by third parties by allowing the secured creditor to overbid with currency that have little or no value, this is not the case. If the market value of the collateral is less than the amount of the secured creditor’s claim, the creditor would have no reason to credit bid if it expects third parties to offer a fair price.

“Credit bidding avoids the transaction costs associated with preparing and financing a cash bid, even one where most or all of the cash would ultimately be returned to the secured creditor, and, by permitting the secured creditor to bid with money already invested, it eliminates liquidity constraints that might otherwise prevent the secured creditor from bidding,” says Donald S. Bernstein, chairman of Davis Polk’s Restructuring Group.

“The right to credit bid in effect permits the secured creditor to establish an “upset price” at the bankruptcy sale, thereby affording the secured creditor a “seat at the table” when the sale of its collateral is contemplated,” he adds.

Credit bidding can also be beneficial to homeowners as it might reduce deficiency claims.

“By hypothesis, the estate is seeking to maximize the value of the collateral and to reduce unsecured deficiency claims against the estate when the proceeds of sale are applied to the secured obligations,” Bernstein says. “Credit bidding both enlarges the frequently small pool of bidders capable of submitting meaningful bids on the often compressed timetable for a bankruptcy sale, theoretically leading to higher and more competitive bids.”

Credit bid

Credit bid: Using collateral to secure a property auctioned at a foreclosure sale.

Credit bid/bidding: Using the amount of the claim secured by the collateral being auctioned to bid in lieu of cash. Credit bidding reduces a mortgage lender’s need for cash during an auction, leaving a mortgage lender with discretion to accept a bid that is lower than the amount owed.

Credit Bid: Buying a Home Without Cash

The right of a secured creditor to credit bid enables them to compete with cash bids in foreclosure sale to ensure that the creditor’s collateral is not sold for less than the secured creditor believes it is worth.

While some say credit bidding blocks bidding by third parties by allowing the secured creditor to overbid with currency that have little or no value, this is not the case. If the market value of the collateral is less than the amount of the secured creditor’s claim, the creditor would have no reason to credit bid if it expects third parties to offer a fair price.

“Credit bidding avoids the transaction costs associated with preparing and financing a cash bid, even one where most or all of the cash would ultimately be returned to the secured creditor, and, by permitting the secured creditor to bid with money already invested, it eliminates liquidity constraints that might otherwise prevent the secured creditor from bidding,” says Donald S. Bernstein, chairman of Davis Polk’s Restructuring Group.

“The right to credit bid in effect permits the secured creditor to establish an “upset price” at the bankruptcy sale, thereby affording the secured creditor a “seat at the table” when the sale of its collateral is contemplated,” he adds.

Credit bidding can also be beneficial to homeowners as it might reduce deficiency claims.

“By hypothesis, the estate is seeking to maximize the value of the collateral and to reduce unsecured deficiency claims against the estate when the proceeds of sale are applied to the secured obligations,” Bernstein says. “Credit bidding both enlarges the frequently small pool of bidders capable of submitting meaningful bids on the often compressed timetable for a bankruptcy sale, theoretically leading to higher and more competitive bids.”

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