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

Closing a business that is clearly in financial distress is difficult. An Assignment for the Benefit of Creditors (an “ABC”) can give your company a better alternative than other means of liquidation. This is a state law process for voluntary business liquidation. In an Assignment for the Benefit of Creditors, you agree to voluntarily hand over your business assets to an independent third party (the Assignee), who will liquidate them and use the proceeds to pay creditors. But an ABC may not be for everyone, and you need to know whether it can be effective for your company.

Companies often choose an ABC because they believe that it will give them a fast, efficient, relatively inexpensive way to dissolve, with less of the stigma that goes along with bankruptcy. With an ABC, you pick the independent third party who will handle the liquidation and payment of creditors. The company can sell its assets fast, without an involved Section 363 sales process. Also, buyers of assets often take them without any unsecured debt.

Over 30 states have laws on Assignments for the Benefit of Creditors, and there are rules in other states based on common law, or the law based on historical cases and judges’ rulings. Some states have court supervision. In contrast, California and Nevada do not require court supervision. The Assignee is not the Trustee in Bankruptcy, but he or she occupies a similar position.

A Better Alternative than Bankruptcy

For some companies, an ABC is a better alternative than bankruptcy because it allows you to pick the Assignee, the independent party who liquidates the business assets and pays creditors. Thus, you can find someone familiar with your industry and the kind of liquidation that works best for it. This differs from a Bankruptcy Case, where the Chapter 7 Trustee is selected by a system under the U.S. Trustee Program. Get recommendations, and ask about candidates’ experience and reputations. Ultimately, you want an Assignee who can use his or her contacts in your industry to find buyers for your business assets.

Assignments for the Benefit of Creditors are generally less expensive and can often be completed faster than Bankruptcy. But if you are a corporation, you will not be discharged in a Chapter 7 Bankruptcy. Federal law discharges only individuals. So the choice is about the relative ease and cost of how the business winds down and dissolves.

Bankruptcy is often a well-known process that gets publicity. With an ABC, it is less likely that the process will be as public as a Bankruptcy Case. Because it is often done outside of court, ABCs can save a business much embarrassment and bad publicity. This is particularly true in states with no court supervision, such as California and Nevada.

An Assignment for the Benefit of Creditors lets you do a quick sale, without the time and potential cost of a Section 363 sale. In some cases, the assignee can close a sale the same day as the assignment.

A buyer in an ABC may be able to avoid inheriting the unsecured debts that have bogged down your business. Thus, the buyer gets a “clean” slate.

A Poor Fit for ABC

One reason some may choose to go through bankruptcy is the automatic stay, which puts most (not all) creditor lawsuits on hold once you file. It immediately stops most creditor collection actions, including garnishments and phone calls, without a court order. An Assignment for the Benefit of Creditors does not have an automatic stay. So your creditors can still sue while you are in the ABC process.

The sale in an ABC is not free and clear of liens. With an ABC, there’s no way to use cash collateral without consent from the secured lender. Junior lienholders with no equity or priority in the sale have no incentive to release their liens. Leases generally cannot be assigned without the landlord’s consent. Insolvency can also be a trigger for default under a lease. So a business that’s a poor fit for ABC is one where secured lenders can be expected to decline consent.

Also, with an Assignment for the Benefit of Creditors, federal government claims have to be paid first. The priority of payment to the United States in an ABC does not apply in Chapter 7 liquidation.

While unsecured creditors do not need to consent to the ABC, creditors who are used to bankruptcy may be wary of the ABC. Such a creditor may seek to force you into bankruptcy by filing an involuntary bankruptcy. To avoid that, it’s often prudent to bring some or all of your major creditors into the process, preferably starting with the planning process before you file for the assignment. However, if an involuntary bankruptcy is filed, your Assignee may be able to ask the bankruptcy court to abstain from hearing the bankruptcy case.

Your Goals

Ultimately, the question of whether an Assignment for the Benefit of Creditors is the right decision comes down to your goals and your situation. How much do you value the speed of the process? Are you willing to give up that speed to get the protections of a bankruptcy case? Would you prefer to know a lot about the third party chosen to handle the assets? Or do you feel secure letting the system pick the Chapter 7 Trustee to do the job?

In some areas, such as New Jersey, professionals say anecdotally that companies fare better in an ABC than in long, complicated federal bankruptcy. There are tradeoffs between the two systems. An Assignment for the Benefit of Creditors can be an attractive alternative if you are looking to wrap up your company and move on.