Also known as credit bidding. The right of a secured creditor (www.practicallaw.com/0-382-3801) under the Bankruptcy Code (www.practicallaw.com/7-382-3256) to use its secured claim (www.practicallaw.com/2-382-3800) against a debtor as currency in an auction of its collateral (www.practicallaw.com/3-382-3343) in a debtor's section 363 sale (www.practicallaw.com/0-386-0841) (§ 363(k), Bankruptcy Code). In most jurisdictions, the secured creditor can offset up to the full face amount of its claim (www.practicallaw.com/4-382-3333) against the purchase price of the collateral. This mechanism allows a secured creditor to acquire the assets of the debtor on which it holds a lien (www.practicallaw.com/8-382-3581) in exchange for a full or partial cancellation of the debt, allowing it to acquire the assets without paying any actual cash for them.
Credit bidding can be used as a defensive strategy by lenders to protect the value of their collateral from falling asset prices. It can also be used as a defensive loan-to-own (www.practicallaw.com/8-386-2450) strategy by investors to acquire distressed assets at below-market prices.
For more information on credit bidding, see Practice Note, Credit Bidding in Section 363 Bankruptcy Sales (www.practicallaw.com/7-500-4339).