Assignment for the Benefit of Creditors: 7 Comparisons Before Choosing an ABC Over Bankruptcy

If you need to close the company but it’s drowning in debt, you can use an Assignment for the Benefit of Creditors (ABC). This can be quicker, cheaper, and more private than bankruptcy. The real trick is that you select the assignee. But the downside is that secured lenders don’t have to cooperate and you won’t have the immediate protection of the automatic stay.

An ABC is established when an insolvent company voluntarily contracts with an independent third-party fiduciary (the “trustee” or “assignee”) to gather, liquidate, and distribute its assets for the benefit of its creditors and in accordance with the terms of the assignment agreement. ABC isn’t federal law, it’s state law. Over 30 states have specific ABC statutes, the rest rely on the common law. And not all states treat it alike. California and Nevada, for example, have no court supervision at all of an assignment. Let’s take a look at an example. In California, after an assignee accepts an assignment, they have 30 days to mail notice to creditors. That notice sets a deadline for them to submit claims against the business, a window of 150 to 180 days.

One difference from bankruptcy is the trustee. In an ABC, the trustee is called an “assignee” and you get to choose it. In bankruptcy, the trustee is appointed, or the creditors can vote for one instead. What that means is that you can look into your assignee’s reputation and industry knowledge, and find one who really knows your market.

An ABC is also often less expensive and faster than a straight liquidation under Chapter 7. And it generally flies under the media radar, avoiding the negative publicity of bankruptcy.

Plus in an assignment you can sell the business fast, in some cases the same day. Section 363 rules in bankruptcy, for contrast, are potentially more cumbersome. And the buyer generally isn’t responsible for the unsecured debt.

Here’s the catch with the sale. If it’s an assignment for the benefit of creditors, you won’t be selling ”free and clear of liens” like in bankruptcy. Nor do leases automatically become assignable without the landlord’s consent. And your insolvency can trigger defaults under a lease or other contract. So the assignment for benefit of creditors is a poor choice if secured lenders will not consent and junior lienholders who are out of the money have no incentive to release. If the secured lender balks at releasing the collateral, there may be no way to use that cash for other obligations. So it’s helpful to talk with your lenders early on.

The other way bankruptcy shines is in a scenario where you must stop collection efforts right away. It has what’s called the “automatic stay”. Collection efforts and lawsuits freeze the moment you file. But there’s no automatic stay in an assignment for creditors.

Then there’s the debt itself. Only individual people get a “discharge” of debt in Chapter 7. No discharge for corporations or LLCs. This is the same with an ABC. The company’s debts don’t go away.

One problem is paying a creditor too close to closing. In California an assignee can generally recover payments made within 90 days of the assignment to a creditor if the business was insolvent and the payment favored that creditor. The assignee has to sue to recover them within a year of the assignment. If you’re in bankruptcy court, they look at payments made to “insiders” and can claw them back for the year before you file.

There’s one more layer of risk for owners. If the business can’t pay over certain trust fund taxes, an owner or officer can become liable for them personally if they were responsible for paying them and they failed to do so willfully.

Finally, unsecured creditors. An assignment doesn’t require them to consent. The bad news is that a private process can worry creditors and invite an involuntary bankruptcy filing. The usual rule is you need three or more creditors who are owed together at least $21,050 more than the value of any collateral. If an assignee took over in an assignment within 120 days of the petition, the court can order relief and convert it into a bankruptcy filing. The flip side of that: If the assignee took over more than 120 days before the bankruptcy petition, the court must excuse the assignee from turning over the company’s property unless the judge thinks it’s needed to prevent fraud or injustice.

Consult with Your Major Creditors Early

So what should you do? Consult with your major creditors early, even before the assignment. If an involuntary petition is still filed, the assignee can ask the court to abstain and let the ABC process continue.

That’s the bottom line: if you do not need the immediate protection of the automatic stay, and secured lenders cooperate, an ABC may be more streamlined, cheaper, and quicker than bankruptcy. In New Jersey, some workout pros say businesses fare better under an ABC than in federal bankruptcy.