Also known as credit bidding. The right of a secured creditor under the Bankruptcy Code to use its secured claim against a debtor as currency in an auction of its collateral in a debtor's section 363 sale (§ 363(k), Bankruptcy Code). In most jurisdictions, the secured creditor can offset up to the full face amount of its claim 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 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 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.