Legal Definitions - claim dilution

Claim dilution is a term used in bankruptcy that refers to the reduction in the likelihood that a debtor's creditors will be fully repaid. This reduction takes into account the time value of money, which means that the longer it takes for a creditor to be repaid, the less valuable that repayment becomes.

For example, let's say a company goes bankrupt and owes money to several creditors. If the bankruptcy process takes a long time and the company's assets are slowly sold off to repay the creditors, the value of each creditor's claim may be reduced due to the time value of money. This means that even if the company eventually repays all of its debts, the creditors may not receive the full value of their claims.

Another example of claim dilution can be seen in the case of a personal injury lawsuit. If a plaintiff wins a lawsuit and is awarded damages, but the defendant is unable to pay the full amount immediately, the value of the damages may be reduced over time due to inflation and other factors. This means that even if the plaintiff eventually receives all of the damages they were awarded, the value of those damages may be less than what they were originally worth.