Assignment for the Benefit of Creditors vs Chapter 7: 5 Reasons Some Companies Choose the ABC

A company that chooses an assignment for the benefit of creditors over chapter 7 is choosing its liquidator, and nearly every other advantage follows from that one. Chapter 7 hands the company to a stranger appointed by a federal official. An assignment hands it to someone the board selected, under a state statute, on a date the board picked.

Both procedures end the company. Both pay creditors in an order someone else wrote. The comparison below keeps to those two routes, uses Florida's chapter 727 as the working example because it is detailed and current, and notes where the example stops. Other states handle assignments differently, and some hardly regulate them at all, so the governing law is the first thing counsel should settle.

1. The Company Picks the Fiduciary

In chapter 7, Section 701(a) directs the United States Trustee to appoint "one disinterested person" from the panel of private trustees to serve as interim trustee. The company has no say in who that is.

In Florida, the assignment is a written, irrevocable instrument "containing the name and address of the assignor and assignee," verified under oath by the company and accepted under oath by the assignee, who then records it, files a petition in circuit court within 10 days, and posts a bond of at least $25,000 or double the liquidation value of the unencumbered liquid assets, whichever is higher. The assignee's duties run to creditors, not to the board that chose it. Choosing the fiduciary is not the same as controlling one, though it is a good deal more than chapter 7 offers.

2. Bankruptcy's Main Benefit Was Never Available to the Company

An individual files chapter 7 to obtain a discharge. A company cannot, because Section 727(a)(1) denies one to any debtor that is not an individual. That removes the chief thing a bankruptcy offers and leaves the two procedures closer than their reputations suggest: each gathers the assets, sells them, and distributes the proceeds, and neither releases the company from what it could not pay.

Florida's statute speaks of a discharge only once in the relevant sense, and it is the assignee's discharge, together with its surety, from liability on matters in the final report. Nothing in chapter 727 discharges the company's debts. Nothing in either route releases an owner's personal guaranty.

3. The Business Can Keep Trading While It Is Sold

A chapter 7 trustee may operate the business only with court permission, under Section 721, "for a limited period" consistent with "the orderly liquidation of the estate." A Florida assignee may conduct the business for up to 45 calendar days if that serves the estate, may extend by an additional 90 days on negative notice if no one timely objects, and may seek more from the court. For a company whose value lies in a staff, a customer list, and a set of contracts that will not survive a month of closed doors, that difference can decide what a buyer will pay.

The same statute that allows the operation also watches it: sales outside the ordinary course need a court order on 21 days' mailed notice to creditors, who may object. A going concern sold this way is still sold in daylight.

4. Fees Are Reviewed, Not Set by Formula

A chapter 7 trustee's compensation is capped by Section 326(a) at 25 percent of the first $5,000 disbursed, 10 percent of amounts above $5,000 up to $50,000, 5 percent above $50,000 up to $1,000,000, and up to 3 percent beyond that, all subject to court approval as reasonable. A Florida assignee's fees and its professionals' fees come before the court under section 727.109 when a party in interest objects or the court raises the question itself.

Whether the assignment costs less depends entirely on the assignee's terms. A board may prefer a fee it negotiated to one it read in a statute.

5. After 120 Days the Assignment Is Harder to Undo

This is where the chapter 7 comparison becomes a matter of timing, and where boards that choose an assignment are most often counting. The Bankruptcy Code treats an assignee for the benefit of creditors as a "custodian," the term Section 101(11)(B) uses for an "assignee under a general assignment for the benefit of the debtor's creditors." That label matters in three places.

The first is the involuntary petition. Under Section 303(b), three or more creditors holding claims that are neither contingent nor the subject of a bona fide dispute, totaling at least $21,050 more than the value of any liens securing them (the figure adjusted April 1, 2025), can file an involuntary chapter 7 petition against a company, and where the company has fewer than 12 such holders, not counting employees, insiders, and certain transferees, one or more holders of at least that amount can file. If the company contests, Section 303(h) orders relief only if the company "is generally not paying" its undisputed debts as they come due, or if "within 120 days before the date of the filing of the petition, a custodian" was appointed or took possession. An assignment made less than 120 days earlier is, by itself, a ground for relief.

The second is turnover. Section 543 requires a custodian that learns of a bankruptcy case to stop administering the property except to preserve it, to deliver the debtor's property to the trustee, and to file an accounting, though the court may excuse compliance if creditors would be better served by leaving the custodian in place. The third is exposure: Section 543(c)(3) directs the court to surcharge a custodian for improper or excessive disbursements, but expressly exempts an assignee "that was appointed or took possession more than 120 days before the date of the filing of the petition."

So the first four months of an assignment are its fragile period, the stretch in which any sufficiently organized group of creditors (and a funder that has watched its daily debits stop, and suspects the assets are being sold to a friendly buyer at a price that reflects the friendship, may be the one that organizes them) can move the whole matter into federal court and put a chapter 7 trustee where the assignee stood. After that, the involuntary route remains open on the "generally not paying" ground, a question of fact for the court, but the assignment itself stops being the reason.

An assignment resembles a boat launched from a dock that the harbor authority may reclaim for four months: seaworthy, but on loan until the tide table turns.

The Florida statute's own protections are narrower than the automatic stay. Section 727.105 bars actions against the assignee except as the chapter provides and bars levies on estate assets in the assignee's hands, but it expressly preserves a consensual lienholder's enforcement against its collateral and a government's police and regulatory actions. A secured funder is not stopped by an assignment in the way it would be stopped by a petition.

What Neither Route Resolves

An assignment and a chapter 7 both liquidate the company and leave the owners' guaranties where they were. A company that must liquidate needs counsel to choose between them, and an assignee or a trustee to carry out the result; neither job belongs to a settlement company. What can be negotiated, often before the choice is made, is the personal exposure that survives it. Delancey Street reviews those guaranties and the advances behind them without charge and in confidence. Not a law firm, it does not act as an assignee, file petitions, or give legal advice, and legal work goes to independently licensed counsel.

Boards that choose an assignment are, in the end, choosing a person and a date. The date matters more than most of them realize, and the 120 days are counted by people who are not on the board.