Assignment for the Benefit of Creditors vs. Chapter 7 Bankruptcy
Many businesses who face financial difficulties resort to bankruptcy to pay their creditors. There are different forms of bankruptcy, and there are also alternatives to bankruptcy. In this post, we’ll explain the Assignment for the Benefit of Creditors vs. Chapter 7 Bankruptcy.
What Is an Assignment for the Benefit of Creditors?The Assignment for the Benefit of Creditors, typically known as ABC is an alternative option for companies in financial distress who don't want to file for bankruptcy. This insolvency procedure is different from bankruptcy in many ways, and the most significant aspect that tells them apart is that ABC falls under the state laws while the federal bankruptcy law regulates bankruptcy procedures. Just like bankruptcy, ABC aims to liquidate a company that is incapable of carrying on its operations and becomes insolvent.
In an ABC procedure, a business has to assign all its assets to a third party, the assignee, who is authorized to sell them in order to repay the company's creditors. There are several advantages in choosing an Assignment for the Benefit of the Creditors over Chapter 7 Bankruptcy. Most businesses opt for ABC because this procedure is cheaper, faster and less complicated than a bankruptcy process.
How Does Chapter 7 Bankruptcy Work?Chapter 7 is a form o bankruptcy available for individuals, corporations, partnerships, or any other types of businesses. Unlike other bankruptcy options, Chapter 7 doesn't require that the debtor file a repayment plan. This bankruptcy procedure allows the trustee to sell the debtor's assets in order to repay that company's creditors. Debtors can retain some of their exempt property after filing for Chapter 7, but the remaining assets will be liquidated according to the provisions of the Bankruptcy Code.
What Are the Differences between ABC and Chapter 7 Bankruptcy?Not all of the company's debts can be discharged through ABC, but the bankruptcy option enables companies with a full discharge.
In a general assignment procedure, you are not allowed to have any non-exempt assets. Chapter 7 Bankruptcy grants you the right to exempt assets.
In Chapter 7 Bankruptcy, the court appoints the trustee that will handle the company's assets. Companies who opt for ABC have the right to select the assignee.
By choosing an assignee, you can increase your chances of selling your assets at the right value. These people are typically appointed for having expertise in the insolvent company's field of activity.
Smaller companies which are managed by a reduced number of people might find it easier to resort to ABC whereas large corporations need the approval of the entire board to do it.
If you are in a hurry to liquidate your assets and pay off your company's debts, ABC might be the best option. However, this is not the only aspect that should influence your decision.
Which Procedure Is the Best?Choosing which way to go depends on the circumstances that brought you here in the first place and the benefits each procedure entails. An experienced commercial lawyer can determine whether an Assignment for the Benefit of Creditors option or filing for Chapter 7 Bankruptcy is better for your company. Only someone who has dealt with both procedures can tell you what outcome you can expect by opting for either one of them.