Assignment for Benefit of Creditors: Alternative to Business Bankruptcy

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When you go out of business, you often have a mountain of debt any many known and unknown creditors to pay. Especially if the business doesn't ahve eough money or assets to cover these liabilities, it can be a daunting task trying to negotiate settlements with your creditors and liquidate the business yourself. While some business owners choose bankruptcy in these circumstances, opting for the bankruptcy trustee to liquidate assets and pay off debts, there is a third choice. 

What Is an Assignment for Benefit of Creditors

The third alternative to liquidating your own business or filing for bankruptcy is to follow a procedure called an "assignment for the benefit of creditors," or ABC. Here you work with one of the many ABC companies or law firms that specialize in liquidating insolvent businesses. Basically, the ABC company will liquidate your assets and pay off your creditors (for a percentage of what it is able to sell your assets for), while you and your co-owners move forward with your lives.

This option generally works well if your business is a corporation or LLC with a lot of debts and assets. A large liquidation can take months or years to wind up—something you probably can't afford to spend your time doing—so it makes it worth selling your assets to a third party in one fell swoop.

How Does Assignment for Benefit of Creditors Work?

Your business assigns (transfers) all of its assets and debts to the ABC company or law firm, meaning that liability for the business's debts moves to the ABC company or firm. You might still be liable for debts with personal guarantees (or all debts if you are a sole proprietor or partner), however, so you want to discuss with the ABC company paying these debts first.

EXAMPLE: Angelo's Meatpacking, Inc., has been suffering from poor sales for the past year, and now Angelo's accounts payable list is growing, creditors are demanding payment, and the company will be out of cash within a few months. Angelo consults with two ABC companies and finds that one company has experience with liquidating meatpacking companies, meaning that this company is more likely to get top dollar selling Angelo's business equipment. Angelo signs a contract with the ABC company (now called the assignee) and provides a list of the company's creditors as well as all of the business assets to be assigned.

First, the ABC company investigates whether Angelo's company can be sold as a going concern. If not, it will send a letter to all creditors notifying them of the fact that the assignment has been made and providing a claim form for each creditor to submit a claim to the ABC company. At the same time, the company advertises the assets for sale in industry publications and, using its contacts, searches for another company to take over Angelo's lease, for a fee. It also publishes a press release simply stating that it has acquired the assets of Angelo's Meatpacking, Inc. After all of the assets have been liquidated, the ABC company takes a percentage of the proceeds as its fee and distributes the rest based on the creditors' claims. In six months, it's all done.

An ABC company will almost always get more for your assets than a bankruptcy trustee will, and it may be able to sell any intellectual property you own to help pay debts, something a bankruptcy trustee usually will not do. Going the ABC route is also usually faster and more private (and less embarrassing) than a bankruptcy.

To learn more about ABCs, you should speak to a business lawyer. You can submit your question or case to a local business lawyer on Nolo's website.

by: , J.D.

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