- December 12, 2018
- Posted by: James Gansman
- Category: Bankruptcy Alternatives
Assignment for the Benefit of Creditors: A Brief Overview
When a business faces insolvency, it’s often tasked with liquidating assets in order to pay its creditors. One common way to accomplish this is to file for Chapter 7 Bankruptcy. In a Chapter 7 Bankruptcy the liquidation process is administered by a Chapter 7 Trustee assigned by a Federal Bankruptcy judge. The Trustee oversees the liquidation of the debtor’s assets, and disburses the proceeds to creditors.
Recently, a state law alternative to bankruptcy has been growing in popularity with business owners seeking to dissolve companies and liquidate assets. Assignment for the Benefit of Creditors, or “ABC” as it is often abbreviated to, has proven to be a viable alternative to a traditional Chapter 7 Bankruptcy filing that can provide several benefits to businesses faced with insolvency.
The primary distinction between these two liquidation methods is who is tasked with the process of liquidating the business’s assets. In a traditional bankruptcy, the Bankruptcy Court appoints a Trustee to liquidate assets. Alternatively, under an ABC, the business owner selects and hires a third-party to liquidate the business’s assets. Under this approach, the business owner transfers all of the business’s assets to the selected Assignee, and the Assignee then liquidates those assets and disperses the proceeds to creditors.
Since an ABC circumvents the need for the lengthy court process involved in a bankruptcy, it often results in a more streamlined, cost-effective, and faster approach to liquidating a business. Furthermore, it allows business owners to choose an Assignee with domain experience and industry knowledge that can obtain a higher price for the business’s assets.
Since ABCs are a state law, rather than federal law, the exact procedures and laws surrounding the process depend on the state the business operates. Choosing which approach is best for your particular business involves many different factors and requires careful examination by a qualified advisor.