Alternatives to Bankruptcy in Maryland: Assignment for Benefit of Creditors

Sometimes a business may find itself failing with closure of the business imminent and creditors pounding on the door, but filing Chapter 11 or Chapter 7 bankruptcy isn’t a possible or practical solution for settling up with creditors. For some companies in this situation, an Assignment for Benefit of Creditors, commonly known as an “ABC,” is beneficial alternative to bankruptcy.

In some ways an Assignment for Benefit of Creditors is much like a Chapter 7 bankruptcy in that all of the company’s assets are sold off and the proceeds used to pay off creditors. However, an ABC is also very different from a Chapter 7 bankruptcy in that it is a private affair and sale of the assets doesn’t need to be approved by a court. An Assignment for Benefit of Creditors is usually faster, yields more money with which to pay creditors, and better protects credit ratings and reputations than a Chapter 7 bankruptcy.

How an Assignment for Benefit of Creditors Works

To initiate an ABC, a majority of the company’s board members and shareholders must approve the action. Then an assignee is identified, usually a professional firm that makes a business of selling business property and assets, and all of the company’s properties and assets are transferred, or “assigned,” to the assignee. It then becomes the assignee’s responsibility to sell the assets and receive the highest dollar amount possible for them. Next, after taking a portion of the sale price as their fee, the assignee distributes the proceeds of the sold assets among the creditors. Secured debts with lenders who can foreclose on or repossess property are paid first and unsecured debts paid last. If there is any money left over after creditor claims are sold, it is returned to the business or the assignors.

Essentially, the assignee fulfills the role of a bankruptcy trustee, but the assignee’s primary goal is to obtain as much money for creditors as possible and they are not answerable to a court or bankruptcy judge. Besides selling assets and paying creditors, the assignee is also responsible for vetting creditor claims and ensuring that only valid claims are paid.

When using an Assignment for Benefit of Creditors, it’s important that, if there are any debts secured by personal property (i.e. the CEO took out a loan on his house to get the company started or to finance an expansion), an arrangement be made with the assignee to pay off those debts first. If sale of the assets doesn’t yield enough funds to pay off all secured debts, the lenders of those debts will foreclose on or repossess the collateral securing those debts. The owners of a failed business don’t want those creditors taking their personal property.

When to Use an Assignment for Benefit of Creditors

If a failing business encounters any of the following, an Assignment for Benefit of Creditors could be a good option. If several of these factors exist, an ABC should be strongly considered.

• Not enough cash exists in the company to continue operating through a Chapter 11 reorganization bankruptcy
• More value exists in the company’s assets than a Chapter 7 bankruptcy trustee is likely to obtain for them
• The company needs to remain a “going concern” during the sale of assets pending a potential sale of the company or similar reason
• Considerable value is tied up in the company’s intellectual assets, which a professional assignee is likely to find a buyer for but a bankruptcy is unlikely to try to sell
• Creditors need to be paid sooner than is likely to occur with a Chapter 7 bankruptcy
• Directors and shareholders want to avoid the stigma of a bankruptcy

Before deciding whether to use an ABC, bankruptcy or any other solution for paying creditors of a failing business, directors and shareholder should consult with an attorney experienced in handling such matters. Experienced legal counsel can help determine which options offer the best advantages as well as aid in avoiding the pitfalls associated with each.

In Maryland, bankruptcy attorney John Burns and his firm have considerable experience in helping businesses resolve debt issues of all kinds. From paying creditors of a failing business to negotiating with creditors in order to keep the business going strong, we are familiar with a wide variety of business debt management solutions. Call our office at 301-441-8780 to schedule an appointment or e-mail us at jburns@burnsbankruptcyfirm.com.