Assignment for Benefit of Creditors vs. Liquidation Bankruptcy: Which One Works Better for Your Company?
When a company finds itself drowning in debt and unable to pay its creditors, it faces a difficult choice: bankruptcy or another method to manage its obligations. In New York, two common solutions for businesses in financial distress are the Assignment for the Benefit of Creditors (ABC) and bankruptcy liquidation.
Both provide ways for companies to deal with their debts, but they differ in terms of procedure, cost, and impact on the business’s future. Todd E. Duffy, PLLC, in New York, New York, can help you decide whether an Assignment for the Benefit of Creditors or Liquidation Bankruptcy is the right choice for your business.
Read on to learn more about the nuances of each option to help you understand which one may work better for your company and how working with a skilled bankruptcy attorney can make a significant difference in managing these processes.
What Is an Assignment for the Benefit of Creditors?
An Assignment for Benefit of Creditors (ABC) is an alternative to formal bankruptcy that allows a financially distressed company to assign its assets to a third-party assignee, typically a neutral party like a bankruptcy attorney or trustee. The assignee is tasked with liquidating the company’s assets and using the proceeds to pay creditors.
Unlike a formal bankruptcy proceeding, which a bankruptcy court oversees, an ABC is a private process. The assignee acts on behalf of the debtor company, and the process is often quicker and more flexible than bankruptcy.
However, an ABC doesn’t discharge the company’s debts like a Chapter 7 bankruptcy would. Instead, it’s primarily intended to satisfy creditors as best as possible, without the challenges and costs of bankruptcy litigation.
Some benefits of ABC include:
Quick process: ABCs are often faster than liquidation bankruptcies, which can be lengthy and complicated.
Lower cost: Since a bankruptcy court doesn’t govern the process, legal fees and administrative costs are typically lower.
Preservation of reputation: As it isn’t a formal bankruptcy, an ABC can help a company avoid the negative stigma associated with filing for bankruptcy.
That said, while an ABC may offer more flexibility, it still results in the liquidation of assets to pay creditors, and it’s important to keep in mind that any residual debt may not be discharged. Therefore, it’s essential to weigh the benefits against the company’s goals and consult a bankruptcy attorney before proceeding.
While an ABC might be an effective alternative, liquidation bankruptcy offers a more structured and formal approach to addressing your company’s debts.
What Is Liquidation Bankruptcy?
Liquidation bankruptcy, commonly known as Chapter 7 bankruptcy, is the formal legal process by which a business dissolves and liquidates its assets under the supervision of a bankruptcy court.
In a Chapter 7 bankruptcy, a trustee is appointed by the court to take control of the company’s assets, sell them, and use the proceeds to pay off creditors. Any remaining debts are typically discharged, meaning the company is no longer obligated to pay them.
The advantages of Chapter 7 liquidation bankruptcy include:
Debt discharge: Once the liquidation is complete, remaining unsecured debts are generally wiped out, providing a fresh start for the business owners.
Court supervision: A bankruptcy court’s involvement establishes transparency and fairness during the liquidation process, providing a safeguard for both debtors and creditors.
Structured process: The liquidation process is clearly defined, with set deadlines and legal guidelines to follow.
However, liquidation bankruptcy also comes with several downsides:
Lengthy process: Unlike an ABC, Chapter 7 bankruptcy is often a slower process, as it involves court hearings and formal creditor negotiations.
Public record: Bankruptcy filings are public records, which means that a company’s financial troubles may be exposed to the public and could damage its reputation.
Costs: Bankruptcy proceedings can be costly, as they involve filing fees, court expenses, and legal fees for both the debtor and the creditors.
Ultimately, liquidation bankruptcy is a more formal, public, and regulated process, often better suited for companies that are truly beyond saving and need a clean slate. If your company is facing insurmountable debts and has no hope of reorganizing, this may be the path to consider.
When considering whether to pursue an ABC or Chapter 7 bankruptcy, you must also factor in how these options affect your company’s creditors and their claims. The following will explore the impact on creditors in both scenarios.
Impact on Creditors: ABC vs. Liquidation Bankruptcy
One of the primary factors influencing your decision between an Assignment for Benefit of Creditors and Chapter 7 liquidation bankruptcy is how each process handles creditors and their claims.
ABC: Creditors in an ABC are typically paid based on the proceeds from asset sales, but they may not receive full payment, depending on the value of the assets. Since ABC is a non-bankruptcy procedure, creditors have more flexibility to negotiate with the debtor company or the assignee. This can sometimes lead to more favorable settlements for creditors.
Chapter 7 bankruptcy: Creditors are divided into priority classes, with secured creditors paid first, followed by unsecured creditors. While all creditors will be treated according to their legal priority, the total amount they receive often depends on the liquidation value of the debtor’s assets. Unsecured creditors generally receive only a fraction of what they’re owed, if anything.
For companies with a large number of creditors or complex creditor claims, Chapter 7 provides a more structured and transparent mechanism for resolving them. An assignment for the benefit of creditors, while less formal, could still provide a way to resolve debts quickly and with less court oversight.
While both options aim to address a company’s financial obligations, the choice between ABC and bankruptcy also depends on the company’s future prospects. The following will explore how each option impacts the company’s future operations.
Impact on Your Business’s Future
The future of your business is likely one of your primary concerns when choosing between Assignment for Benefit of Creditors and Chapter 7 bankruptcy.
ABC: Since an ABC is a private and non-judicial process, it can sometimes allow the company’s business operations to continue during the liquidation process. While it’s still primarily a method for liquidating assets, an ABC may allow for a smoother transition and give the business an opportunity to restructure or reorganize if needed. However, the company is still required to resolve its debts, and it may not be able to continue operations in the long term.
Chapter 7 bankruptcy: In contrast, a Chapter 7 liquidation generally marks the end of the company’s operations. Once the assets are liquidated and debts are discharged, the business ceases to exist. While the company may be able to restart under a new name or structure, the bankruptcy filing itself is a permanent record of the company’s financial failure.
For a company that still has potential to reorganize or continue operations after settling its debts, an ABC may offer a more flexible approach. Chapter 7 bankruptcy, on the other hand, is often the right choice for companies that are winding down and no longer have a viable path forward.
Choosing the best solution for your company involves more than just the immediate outcome. The decision also depends on the specific circumstances of your business, including its size, assets, and potential for reorganization. Consulting with a bankruptcy attorney can help you make an informed decision tailored to your needs.
Speak to a Bankruptcy Attorney Today
Working with an experienced bankruptcy attorney is crucial to discuss your options and find the solution that works best for your unique situation. If you need legal assistance, contact Todd E. Duffy, PLLC. The firm is proud to serve clients in New York, New York as well across New York and New Jersey. Reach out to Todd E. Duffy, PLLC today.
