Assignment for Benefit of Creditors. What Advantages Are There?
ABC – assignment for the benefit of creditors might be the solution for your insolvent business. This procedure entails several advantages, but it’s by no means as simple as ABC. In this post, I will summarize the main benefits of this bankruptcy alternative and help you understand how it works.
What Is ABC?An assignment for the benefit of creditors is a liquidation option for companies that have debts and don't want to resort to bankruptcy. This procedure is not regulated by the federal bankruptcy law, but by state law. So, it functions differently across the states. However, we are not going to focus on the particularities that distinguish this procedure on a state-by-state-basis, but on what ABC implies and how it can benefit you.
When Is It Useful?Companies that are financially challenged often end up having to choose bankruptcy. Some try to file for Chapter 11, others for Chapter 7. But many times, business owners are surprised to find out that their company doesn`t qualify for these options. At this point, they will most probably discover that there is an alternative choice - ABC.
When I first introduce this option to my clients, I always make sure that they understand the basic differences between bankruptcy and ABC. Sometimes, it's essential for them to keep a business operating even during liquidation; in such cases, ABC is the key.
How Does ABC Work?In an assignment for the benefit of creditors, the debtor has the right to choose an assignee. This person will operate as an independent third party and take control over the company's assets. The debtor and the assignee enter an agreement by which the debtor transfers all of the company's rights, titles and interest to the assignee.
The assignee will then start liquidating the assets in order to repay the company's debts. The creditors are divided into two categories; secured and unsecured. The first will get paid according to the money obtained from their security, the latter will not be able to pursue the sold assets, and they will have to file a proof of claim.
What Are the Advantages?- ABC is a much simpler liquidation mechanism compared to a traditional bankruptcy procedure
- The debtor, or assignor, has the right to select an assignee of their choice; someone who has proven experience and understands the assignor's business
- This procedure offers more flexibility during liquidation
- In ABC, the assignor can usually choose what is going to happen before and during the execution of the assignment
- The assignment for the benefit of creditors requires less administrative expenses than Chapter 7 or Chapter 11 Bankruptcy
- ABC takes less time than a bankruptcy process which goes through court and may be subject to delay
- ABC causes less reputational damage than traditional bankruptcy where the company is clearly labeled with the term 'bankrupt'
- An assignment for the benefit of creditors implies far less parties than a bankruptcy procedure which involves the bankruptcy trustee, the U.S. trustee, the committee of the unsecured creditors, the bankruptcy judge and, in some cases, additional parties
- In ABC, the execution of the assignment and an acquisition transaction can be carried on at the same time; for example, if a buyer has agreed to a transaction before the assignment is effective, this person can purchase the company and exclude the former owner's unsecured debt
ABC can be a less burdensome alternative to bankruptcy. This liquidation method can be a great solution for companies that require fast action or more expertise in order to leverage the real value of the assets they are liquidating. As always, to know what option is the right one for your company, it's necessary to reach out to a lawyer who has a vast experience in bankruptcy cases.