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ABC or bankruptcy: What should business owners know?

Those who own an insolvent business may want to step away from the business as quickly as possible while losing as little as possible. Or, in other cases, they may have an opportunity to sell their business to another party. That party may be interested in the business but want assurance the unsecured debts are dealt with first. In either of these situations, an assignment for the benefit of creditors (ABC) may provide a beneficial alternative to bankruptcy.

What is an ABC?

An ABC is a business liquidation device. In many states, businesses struggling with insolvency can choose an ABC instead of bankruptcy. A Chapter 7 bankruptcy for liquidation of the business or a Chapter 11 bankruptcy for restructuring the business will use federal law. These cases require the use of federal courts and judges. They can take time. An ABC essentially transfers the business into a trust. As a result, in certain situations it can have lower administrative costs compared to bankruptcy. This can also save time as those who choose to move forward with an ABC will not have to plan around the federal court schedule.

The process also tends to provide better publicity for all involved. As noted by the American Bar Association, the media surrounding an ABC generally reads “Company X acquired by Company Y,” instead of “Company X files for bankruptcy.”

How does the process work?

An ABC generally requires authorization from the board of directors and approval from the shareholders. Once approved, the business assigns, or transfers, all of its assets and debts to a third party to liquidate the assets and pay off the creditors.

Business owners should carefully consider an ABC as well as other options when trying to run a business struggling with insolvency. It is important to review and consider all options before moving forward. This will help better ensure you choose the option that best protects your business interests.

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