Business Bankruptcy vs. Assignment for the Benefit of Creditors (ABC): Key Considerations for Struggling Businesses

While struggling businesses have a variety of options for dealing with financial distress, two of the primary options in this scenario are: (i) pursuing a business bankruptcy under Chapter 7 or Chapter 11; and (ii) pursuing an assignment for the benefit of creditors (ABC). Each of these options presents its own unique set of considerations, and business owners must make an informed and strategic decision based on the specific circumstances at hand. Learn more from an experienced Miami business bankruptcy attorney at Edelboim Lieberman:

Key Considerations for When to Pursue a Business Bankruptcy (Chapter 7 or Chapter 11)

While business bankruptcies often get lumped together, filing under Chapter 7 and filing under Chapter 11 are two very different approaches to dealing with a company’s financial distress. As a result, when considering the options that are on the table, it is important to consider filing under Chapter 7 and filing under Chapter 11 separately.

Chapter 7: Liquidating the Business’ Assets and Winding Up Its Affairs

Filing for bankruptcy under Chapter 7 involves using the business’s remaining assets to pay its creditors (to the extent possible) in their order of priority. As such, filing under Chapter 7 also generally means winding up the business’s affairs. During the Chapter 7 bankruptcy process, the bankruptcy trustee will sell the company’s assets, and then the trustee will distribute the sale proceeds in accordance with the relevant provisions of the Bankruptcy Code.

Crucially, if the business’s owners have personally guaranteed its debts (or if the business’ owners can be held liable for the business’s debts on other grounds), then they could be at risk of facing liability if the business’s assets are insufficient to satisfy all creditor claims. This is a factor that requires careful consideration when deciding how best to proceed under the circumstances at hand.

Chapter 11: Reorganizing the Business’ Debts So It Can Continue Operating as a Going Concern

In contrast to filing under Chapter 7, filing for bankruptcy under Chapter 11 involves reorganizing the business’s debts so it can continue operating as a going concern. The business remains in business, and its owners are not at immediate risk of facing personal liability.

Reorganizing under Chapter 11 is a good option for struggling businesses that need time—and some financial flexibility—to get back on solid ground. Provided that a business can meet its obligations under its reorganization plan, it can continue operating without the risk of facing default and collection action. When necessary, struggling businesses can seek debtor-in-possession (DIP) financing through the Chapter 11 process as well, providing access to the additional capital needed to invest in the business’s future.

Importantly, many small (and even not-so-small) businesses are eligible to file for reorganization under Subchapter V of Chapter 11. While traditional Chapter 11 proceedings can be prohibitively expensive for many smaller companies, Subchapter V establishes streamlined procedures for “small business bankruptcies” that substantially reduce the costs involved. As a result, if you think that reorganizing your business’s debts might be the best path forward, you will want to talk to a Miami business bankruptcy attorney to find out whether a Subchapter V filing is a viable option.

Key Considerations for When to Pursue an Assignment for the Benefit of Creditors (ABC)

Pursuing an assignment for the benefit of creditors (ABC) is an alternative to filing under Chapter 7. For businesses that are prepared to wind up their affairs, pursuing an ABC can offer several advantages compared to liquidating under Chapter 7. These include (but are not limited to):

• Additional Privacy – While ABCs are subject to court supervision, they offer greater privacy than Chapter 7 bankruptcy proceedings.
• Greater Return – The assignee involved in an ABC will frequently be able to sell the business’s assets for a greater return than would be possible through the Chapter 7 bankruptcy process.
• Faster Result and Lower Costs – Since an ABC is not subject to the same strict rules as a Chapter 7 bankruptcy proceeding (though rules still apply), pursuing an ABC can be both faster and less costly than pursuing liquidation under Chapter 7.

With that said, while filing under Chapter 7 triggers an automatic stay on creditor claims, pursuing an ABC does not. This can be a significant downside in some cases. Depending on the circumstances, there may be other benefits to liquidating under Chapter 7 as well. As a result, informed decision-making is essential, and business owners will want to consult with an experienced Miami business litigation attorney as early as possible to maximize the options they have available.

Alternatives to Business Bankruptcies and ABCs

While pursuing a business bankruptcy (under either Chapter 7 or Chapter 11) and pursuing an assignment for the benefit of creditors (ABC) are two of the primary options that are available to financially distressed businesses, these are not necessarily the only options that are on the table. In some circumstances, struggling businesses may be able to pursue other, less formal options as well. These include (but are not limited to):

• Contract Renegotiations – Depending on the circumstances, businesses may be able to negotiate with key vendors, lessors, or lenders to secure more favorable terms.  
• Forbearance Agreements – Forbearance agreements provide businesses with additional time to come current on their debts without facing collection actions.
• Informal Debt Restructuring – Informal debt restructuring involves working with individual creditors to establish mutually agreeable payment plans.
• Internal Restructuring – In some cases, struggling businesses may be able to restructure their finances and operations to reduce their overhead and free up additional cash flow.

Schedule a Free Initial Consultation with a Miami Business Bankruptcy Attorney at Edelboim Lieberman

If your business is struggling and you would like to know more about the options that are available, we invite you to get in touch. Each Miami business bankruptcy attorney at Edelboim Lieberman has extensive experience guiding clients through each of the options discussed above. To get started with a free initial consultation, please call 305-768-9909 or tell us how we can get in touch online today.