Assignment for the Benefit of Creditors: Alternative to Business Bankruptcy

A look at an alternative to bankruptcy with a step-by-step guide that gets your assets sold and creditors paid.

By , Attorney · UC Law San Francisco
Updated by Amanda Hayes, Attorney · University of North Carolina School of Law

When you go out of business, you often have a mountain of debt and many known and unknown creditors to pay. Especially if the business doesn't have enough 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's a third choice.

What Is an Assignment for the 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. An ABC, as the name would suggest, is an assignment with the purpose of liquidating assets to benefit creditors by getting them paid.

Here you, the assignor, work with one of the many ABC companies or law firms that specialize in liquidating insolvent businesses. Basically, the ABC company, called the "assignee," 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.

Why Choose an Assignment for the Benefit of Creditors?

An ABC 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.

Benefits of an ABC

This option has many advantages that make it an attractive alternative for businesses ready to close shop:

  • Saves time. Though it could take more than a year if a business has a lot of assets and complicated creditor claims, usually businesses finish with the winding up process within months. This is a great benefit when you want to put your business behind you as quickly as possible.
  • Less publicity. While going through an ABC in the courts is public information, these records are typically harder to access. You probably don't want to advertise your financial woes–it can be embarrassing and also scare off potential buyers when liquidating assets. ABCs are usually done quickly and quietly, minimizing any unwanted exposure.
  • Transfer is simpler. There's only one transfer in an ABC from the assignor business to the assignee company. The assignor transfers all of its assets and liabilities to the ABC company in a single business deal. Not only do you not have to find a buyer—perhaps multiple buyers—for all of your assets, but you also don't have to deal with each creditor's claims. Instead, you pass on the many tasks required to wind up a business to the assignee.
  • Business chooses the assignee. In an ABC, the assignor business can choose the assignee. You can do your research to select the best assignee for your interests, giving you more agency. For example, a computer equipment business can choose to assign its assets and liabilities to an ABC company that has worked with other computer equipment businesses in the past. The ABC's experience with previous computer equipment businesses means it already has contacts in that industry and it better understands each asset's worth.
  • Cost-effective. Winding up a business can be expensive, and the value of assets can diminish quickly. By the time you're done paying creditors, lawyers, accountants, and advisers, you might not have any money left from selling off your assets—or worse, you could be in serious debt. With the ABC alternative, your assignee will use its contacts or an auctioneer to get top dollar for your assets and its expertise to lower administrative costs.

ABC vs. Bankruptcy

If you're considering an ABC, you might also be considering bankruptcy. While bankruptcy might be a useful and more familiar option for some, ABCs are usually the better alternative.

An ABC company will almost always get more for your assets than a bankruptcy trustee will. It also might be able to sell any intellectual property you own to help pay debts, something a bankruptcy trustee usually will not do.

Businesses can also choose an ABC company to take over their business whereas in a bankruptcy proceeding, the court would assign a trustee. You can choose to work with an assignee that is more closely tailored to your interests and industry-specific needs, which can then result in a higher return on assets and an easier transition.

Again, going the ABC route is also usually faster and more private than a bankruptcy. The U.S. has an entire federal system dedicated to only bankruptcy cases. But this dedicated system doesn't translate to quicker conclusions; it only makes it easier for others to find information about past and present cases. Instead, businesses are caught up in a long, burdensome legal proceeding where their name will be on record alongside the word "bankruptcy."

If you have questions about whether an ABC or bankruptcy is the right choice for your business or you need guidance on which ABC company is best suited for your business, you can consult with a business attorney. They can help you understand your state's ABC laws and what your particular business can expect.

How Does Assignment for the Benefit of Creditors Work?

Many states have laws—either statutes or common law (law made by the courts)—that control the process for an ABC. Depending on the state, an ABC might be done with court oversight or outside the court. For example, Delaware and New Jersey involve the courts but Georgia and California don't.

Although states have different requirements, an assignment for benefit of creditors generally follows this procedure:

1. Your Business Votes to Approve the ABC

State law and your company's governing documents will determine

  • whether the ABC needs to be approved
  • who must approve the ABC—for example, the Board of Directors and shareholders could both need to vote, and
  • how many votes are required—for instance, the vote might need to be unanimous.

For corporations, the governing documents are the articles of incorporation and bylaws. For LLCs, the governing documents are the articles of organization and operating agreement.

For instance, a corporation's bylaws might require that an ABC be unanimously approved by the Board of Directors and by two-thirds of the voting shareholders.

2. Your Business Selects an Assignee and Makes the Assignment

You should research and compare different companies and firms that specialize in ABCs in your state. You might find that one has experience in your particular industry or has better reviews.

It might also make sense for the assignee to continue with business operations after the assignment so your business's assets don't lose their value. In this case, you'll want to make sure you choose an assignee that has familiarity with running your kind of business.

Once you choose a company, you should make the assignment. The ABC assignment agreement is sometimes called a "general assignment agreement" or "deed of assignment." Some states require assignment agreements to follow certain terms. Generally, the agreement should be in writing, list out the assets to be assigned and the known creditors, and be fair to each creditor.

After signing the agreement, 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're a sole proprietor or partner), however, so you want to discuss with the ABC company paying these debts first.

Also, you might need permission from the other party to assign any ongoing agreements or leases. For example, your lease might require you to get written permission from your landlord before assigning your leasing obligations to someone else.

If you're in a state where the ABC is done through the court, you might need to file certain paperwork for the court to approve your ABC. That paperwork could include:

  • a petition asking the court to approve the ABC and assignee
  • a copy of the assignment agreement
  • a list (or "schedule") of assets
  • a list of creditors and what is owed to each, and
  • an attestation verifying that the list of assets and creditors are accurate.

Typically, the assignee will file this paperwork for you. But you'll need to provide the assignee with a list of creditors and assets—usually in the assignment agreement—along with general access to your financial records. If the court approves your ABC, the assignment becomes official. Your assignee can then begin to fulfill its duties, which include selling your assets and paying your creditors.

3. Assignee Notifies Creditors

The assignee will then publish a public announcement that the transfer has been made and that any creditors that have a claim against the assignor should submit that claim before a certain date. State law typically lays out when notice should be given and how long creditors have to make their claims. The assignee should give individual, direct notice to known creditors.

The assignee should also investigate the assignor's books to determine whether there are any creditors, previously unknown, that can be identified and if there are any debts that have gone unnoticed.

4. Assignee Sells Assets

The assignee should keep all transferred assets in a trust account, if possible. It has a duty to make a reasonable effort to get the best price for the assets. The ABC company might decide to liquidate assets through a public or private auction, a private sale, or some combination of the three.

The company will sell any real property (like, office buildings or land) and personal property (like, equipment, furniture, supplies, inventory, and vehicles). It might hire an auctioneer to encourage higher bids for the assets and increase profits or an appraiser to assess a property's value prior to a sale.

Both you and your creditors benefit from higher profits. The more money the assignee can get for your assets, the more money they'll have to pay off your creditors. A happy creditor is less likely to petition the court for involuntary bankruptcy—the very option you're trying to avoid—or to resist the ABC process, which could cost your assignee time and raise the assignee's fees. Also, if it's able to make a high enough profit from selling your assets, the assignee might have some money left over to distribute to you after paying your creditors' claims.

If any of the property is secured, the creditors usually have to consent to its sale. Property is secured when it's used as collateral for a loan. If you don't make payments on the secured loan, the creditor can take your collateral. Because secured creditors are entitled to the collateral, they have an interest in where that property ends up. It's easier to get a secured creditor's consent when the assignee can assure the creditor that they'll get the best price for the secured property, doing the creditor's work for them.

5. Assignee Pays Off Creditors

At this point, assume all assets have been sold off and the deadline has passed for creditors to make their claims. It's now time to pay creditors with the proceeds from the sales. If any money is left over after paying creditors, administrative costs, and the assignee's fee, the assignor can collect the remaining amount.

Many states have requirements for how money should be distributed to creditors, and states differ on which claims have priority over others. The assignee is responsible for following the correct order of claims.

Generally, money will be distributed in the following order:

  1. secured creditors' claims
  2. assignee's fees and expenses—for instance, the fees of any professionals hired by the assignee
  3. federal government's claims
  4. unpaid wages and benefits
  5. any taxes owed (income, property, and excise) along with any associated penalties, and
  6. general unsecured claims.

6. Assignee Closes Out the Business

Once the assignee has liquidated the assets and paid off all creditor claims, its job is basically done. All that's left to do is to take a final account of all the money that went in and out during the assignment, including everything sold and distributed.

If the assignment is under court supervision, the assignee will notify the court that its job is done and give the court a final account of the assets sold and the creditors and fees that have been paid. The assignee will also notify you, as the assignor, of the conclusion of the matter. The ABC company might also be required to notify creditors that the assignment has finished and all claims have been satisfied.

At this point, if you haven't done so already, you should dissolve your business. If your state law requires you to get a tax clearance certificate before you can dissolve, then you'll have to wait until your state taxes are paid up to file for dissolution. But you should dissolve your business sooner rather than later to avoid the liabilities of an ongoing business if:

  • you don't have to wait to obtain tax clearance, and
  • your assignee continuing your business throughout the ABC process doesn't benefit you—as where your business still being active is making your assets more valuable for an eventual sale.

Example of Assignment for the Benefit of Creditors

Angelo's Meatpacking, Inc., in California, has been suffering from poor sales for the past year, and now its 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 has experience 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 (which is now the assignee) and provides a list of the company's creditors as well as all of the business assets to be assigned. Because California law doesn't require court involvement, the ABC company can start the assignment process right away.

First, the ABC company investigates whether Angelo's company can be sold as is—as an operating business—or whether it'll need to shut down and be liquidated. If it can't be sold as an operating business, the ABC company 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. There's no need to file any documents with the court to close out the process.

With all state taxes paid, Angelo obtains a tax clearance certificate from California and files a certificate of dissolution. Within six months of Angelo signing with the ABC company, it's all done.

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