Linn Energy LLC has confirmed that it had not fully secured bond swaps with its agreed collateral. This incident will further create a major problem for its creditors if oil and gas producers will seek bankruptcy protection.

Franklin Templeton Investments managed the funds of oil and gas properties that were offered by Linn to its creditors. This has persuaded them to accept a 50 percent loss on unsecured debt reaching up to $2 billion.

According to the Motley Fool, Linn hasn't had much time to address its increasing debt which has a deadline of 30 days. The month of April will be considered the redetermination of its credit facility.

According to Ted Gavin of the Gavin/Solonese restructuring firm, if the company fails to meet the deadline and files bankruptcy, the debt holders will be forced to go to court to claim the collateral they thought they had already secured. He added that it is an uphill battle and the possession of documents are important when asserting a secured claim as per Reuters.

For the creditors who have not entered into swapping and retaining their original unsecured papers, Linn's failure to hand over the collateral could be considered an advantage. When bankruptcy comes, there would be fewer creditors that must be paid ahead. The company's creditors which holds $2 billion of their unsecured debts have turned their holdings for an additional $1 billion new debt.

The oil and gas exploration companies have swap the bond deal to try and cut debt and reduce expenses. This has given Linn an extra space to move as oil prices lingered below $40 per barrel. As reported by The Wall Street Journal, the Houston-based company has focused its exploration as well as its production in the Colorado Rockies, Hugoton Basin, California, Permian Basin, and east Texas, North Louisiana, Michigan, South Texas, Illinois and the Mid-Continent.

Linn has about $10 billion in debt and if the company decides to file for bankruptcy, it will be considered as the biggest loss in the current oil industry.