How to Actually Make Money in Bankruptcy: Lessons from Joe Sarachek
Claims trading, structured payouts, and why most investors get it wrong.
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Special Feature: Interview with Joseph Sarachek
This week, I’m sharing a special interview with Joseph Sarachek, one of the most seasoned voices in the distressed debt world. Joe is the Managing Partner at The Sarachek Law Firm and has been involved in hundreds of bankruptcy cases over the past three decades. He’s served as creditor counsel, Chapter 11 Trustee, investor, and Chief Restructuring Officer, and is widely regarded as one of the foremost authorities in trading privately held distressed claims.
In addition to running his firm, Joe is a principal in Strategic Liquidity Fund, teaches bankruptcy investing at NYU Stern, and has lectured at institutions like Harvard Law School, Cornell, and the American Bankruptcy Institute. Joe recently published a book, The Distressed Investing Playbook, which blends case studies, strategy, and legal nuance for anyone looking to sharpen their edge in special sits and bankruptcy claims. If you’re serious about this corner of the market, it’s worth a read
Below is our conversation, lightly edited for clarity and flow.
1. You’ve spent decades on both the legal and investment side of distressed debt. What is something most investors consistently get wrong about bankruptcy processes or claims trading?
Most investors enter bankruptcy processes too early. They think they’ll miss out if they wait, so they jump in with incomplete information and minimal diligence. Sometimes that works out, but often it doesn't. That’s not disciplined value investing. Take FTX—you could have bought claims at 10 cents on the dollar early on, and now they’re worth 140. But you also could have waited nine months, bought in at 50, and taken on far less risk. Contrast that with Sears. If you bought general unsecured claims early, you were wiped out. But if you waited six to nine months and bought administrative claims, you could have made a strong return. Timing and discipline matter.
2. What’s one legal tactic or restructuring playbook move that more investors should understand but often don’t until it’s too late?
My friend Ira Perlmutter, who I call “Mr. Due Diligence”, would thoroughly read every document and evaluate every alternative before investing. That mindset—of doing the work and understanding every lever—is the tactic. Too many people skip it.
In situations where there’s a lot of uncertainty and risk, sometimes a structured purchase is the best route. For example, there is a matter we’re working on where we estimate the asset may be worth 20% of par. We are paying 5% now and sharing 50% of the upside, which could yield another 7.5%. The seller really wants 12.5% upfront, but that seems like a risky and uncertain investment. While paying 10–12.5% means your downside is capped, a structured deal that gives the seller 50% of upside is generous and may even allow for a future buyout of the seller if distributions play out over time.
3. How do you think creditor-on-creditor violence evolves from here? Are cooperation restrictions and drop-downs just the start?
The recent Fifth Circuit ruling in the Serta Simmons case delivers a clear rebuke to creditor-on-creditor violence, significantly impacting how aggressive creditor-favoring transactions (like uptiers) are handled.
Uptier exchanges aren’t “open market purchases”: The court held that Serta’s 2020 uptier—where a select group of lenders negotiated privately and jumped ahead of others—did not qualify as an open market purchase. The term “market” means a public or syndicated loan market, not a closed, private deal with handpicked lenders.
Pro rata rights are sacred: The ruling reinforced that lenders of the same class must be treated equally. Favoring one group without opening the opportunity to all violates fundamental contract rights.
Indemnities protecting uptier participants were invalid: The court struck the indemnity provisions in Serta’s bankruptcy plan, ruling they violated the Bankruptcy Code and treated creditors unequally.
Separately, I’m a principal in Strategic Liquidity Fund, SLFAQ, LLC, which purchases claims, loans, and various rights to payment. SLFAQ bought a piece of the Thrasio loan, which was owned by a consortium that included Oaktree, Bain, Goldman Sachs, and Monroe Capital. Rather than pursue creditor-on-creditor violence, they welcomed SLFAQ into the DIP and post-bankruptcy secured capital structure. Restructuring advisors on that deal noted that the use of aggressive creditor tactics is subsiding due to cost concerns and the chilling effect of the Serta decision.
4. How do you think the rise of private credit and direct lending has impacted recoveries and creditor dynamics in recent bankruptcies?
Private credit has sucked the living daylights out of companies. Look at Saks Fifth Avenue and Neiman Marcus. If Saks files, there will be absolutely nothing left for trade vendors. Zero. Zip. Every asset that could be financed has already been pledged.
5. What is the most interesting or underappreciated claim or illiquid distressed situation you’ve worked on recently?
Litigation claims and commercial judgments. That’s where some of the most interesting opportunities are today. My team built SLX Markets to help holders of judgments get liquidity and allow firms like mine to capture equity-like returns.
6. What’s one part of the bankruptcy code that sophisticated creditors routinely weaponize — and one part they consistently overlook?
DIP loans are routinely weaponized with restrictive covenants and control mechanics. On the flip side, investors often overlook the value left at the very end of a bankruptcy case. The appointment of a liquidating agent is where a lot of value can still be harvested, but by then most investors are fatigued or have moved on.
7. In your experience, how do investors get emotionally or cognitively trapped during distressed workouts? What biases or bad assumptions tend to creep in?
Too much debt is often left on the business post-reorg. Investors are afraid to take full equitization. But when you see a Chapter 22, it’s usually because creditors didn’t push for enough equitization the first time. That’s a recurring error.
Bonus: What is the most chaotic restructuring negotiation you’ve ever been a part of?
I’ve worn many hats—debtor’s lawyer, creditor’s counsel, CRO, board member, trustee, investor. The common thread in chaotic situations is that superior intellectual capital drives value. A few examples:
Petrowax: An oil derivative manufacturer in bankruptcy for years. It could have been a full liquidation, but a sharp board and management team turned it into a massive win for Aurora Capital Partners, led by former Treasury Secretary Gerry Parsky.
Cinecom Entertainment Group: A movie distributor that ended up with The Blair Witch Project. A grand slam, thanks to Amir Malin’s leadership. I talk about this in my book.
Agriprocessors: The largest kosher meatpacker in the U.S. I served as Chapter 11 Trustee. When I took control, the plant—which cost over $100 million to build—was shut down. It was a mess: 500,000 live chickens, 350 turkeys, hundreds of trucks. We brought in the guy who built the plant back in 1965, restarted operations within months, and the business is still running 17 years later. Thousands of families now depend on it.
The takeaway? Find the smartest people with deep domain expertise and give them just enough money to operate. One person’s genius can change the outcome.
My first boss used to say, “It takes one person to make a business.” He was right.
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This is an awesome read - need more interviews like this!