Business Debt Restructuring: Alternatives to Bankruptcy

Most businesses that resolve insolvency never appear before a bankruptcy judge. The assumption that Chapter 11 represents the sole mechanism for corporate debt relief persists despite decades of evidence to the contrary. Out-of-court workouts, assignments for the benefit of creditors, and Subchapter V proceedings have displaced traditional reorganization as the dominant instruments of financial rehabilitation. The question confronting an indebted business is not whether to restructure but which form of restructuring preserves the most capital, the most control, the most time.

A distinction must be drawn at the outset between reorganization and liquidation, between the desire to continue operations and the decision to wind them down. Each of the mechanisms discussed here occupies a different position on that spectrum. Some permit the business to emerge intact. Others exist to extract maximum value from dissolution. The selection of one over another constitutes a strategic determination with consequences that persist for years.

The Out-of-Court Workout

Bilateral negotiation between debtor and creditor remains the oldest form of debt resolution. It is also, when conditions permit, the least destructive. An out-of-court workout involves the consensual modification of existing obligations without judicial intervention. Interest rates are reduced. Maturities are extended. Covenants are waived or rewritten. The debtor retains possession of its assets. The creditor avoids the costs of litigation and the uncertainty of court-supervised proceedings.

That word “consensual” carries the full weight of the arrangement. No court compels participation. No automatic stay prevents a dissenting creditor from continuing collection. A single objector among a company’s lending group possesses the capacity to dismantle months of negotiation. Practitioners refer to this as the holdout problem, and it constitutes the principal vulnerability of every out-of-court process.

The appeal, however, is considerable. A workout conducted behind closed doors generates none of the publicity that attaches to a bankruptcy filing. Vendors continue to extend credit. Customers maintain confidence. The business operates without the stigma of formal insolvency proceedings. For companies whose distress is financial rather than operational, whose revenue model remains sound but whose capital structure has become untenable, the workout offers rehabilitation without confession.

Liability management exercises represent the institutional variant of this principle. LMEs accounted for 65 percent of default activity by volume in recent quarters, a figure that has grown from nine percent in January 2020. The mechanism varies. Some involve uptier transactions that subordinate existing debt to new priority obligations. Others employ dropdown restructurings that move valuable collateral beyond the reach of certain creditors. The phrase “creditor-on-creditor violence” has entered the professional lexicon to describe the more aggressive iterations, in which a subset of lenders cooperates with the borrower to improve its own position at the expense of excluded participants.

Yet only fourteen percent of companies executing an LME avoid subsequent bankruptcy. The statistic invites a particular sobriety. These are instruments of deferral as much as instruments of resolution. Whether they constitute a bridge to recovery or a postponement of the inevitable depends on facts that resist generalization.

Subchapter V: The Small Business Reorganization Act

Congress enacted Subchapter V in 2019 to address a structural deficiency in the Bankruptcy Code. Traditional Chapter 11 was designed for large corporate debtors. The procedural requirements, the mandatory appointment of creditors’ committees, the adversarial plan confirmation process, the quarterly fees payable to the United States Trustee, all of these imposed costs disproportionate to the estates of small enterprises. Attorney fees for a conventional Chapter 11 exceed six figures as a matter of course. Retainers of $25,000 to $50,000 represent the minimum. For a business with $2 million in debt, such expenditures consume resources that would otherwise be available to creditors.

Subchapter V eliminated the creditors’ committee. It shortened the confirmation timeline. It granted the debtor exclusive authority to propose a plan of reorganization, removing the threat of competing plans from creditor groups. A trustee is appointed, but the role resembles that of a facilitator rather than an adversary. The debtor remains in possession. The debtor continues to operate.

Eligibility requires that aggregate noncontingent liquidated debts not exceed $3,024,725, with at least fifty percent of that amount arising from commercial or business activity. An adjusted threshold of $3,424,000 in total debt took effect in April 2025. The plan must propose repayment over three to five years from projected disposable income. These are not insignificant constraints, but they describe the circumstances of a substantial portion of American small businesses.

Subchapter V filings rose eleven percent in 2025 as small enterprises contended with rising labor costs, supply chain disruptions, and the tariff regimes that reshaped import economics. The increase signals both the growing familiarity of the bar with the procedure and the enduring financial pressures that produced the Small Business Reorganization Act in the first place.

One qualification deserves attention. Subchapter V remains a bankruptcy proceeding. It appears on the public record. It triggers the automatic stay, which provides protection from creditors but also announces the debtor’s condition to the market. For businesses that depend on the perception of stability, that announcement carries its own cost.

Assignment for the Benefit of Creditors

An assignment for the benefit of creditors occupies a different position in the taxonomy of insolvency remedies. Where workouts and Subchapter V contemplate the survival of the enterprise, an ABC contemplates its orderly dissolution. The debtor transfers all assets to a third-party assignee, an independent fiduciary selected for experience in insolvency administration. The assignee liquidates those assets and distributes proceeds to creditors according to a statutory or common-law priority scheme. The business ceases to exist.

The advantages are procedural. An ABC involves less court oversight than Chapter 7 bankruptcy, fewer procedural requirements, and a shorter resolution timeline. The assignee functions as a trustee would but without the apparatus of the federal bankruptcy system. Asset sales proceed with greater speed. Administrative costs are lower. For a company whose operations cannot be salvaged but whose assets retain value, the mechanism provides creditors with better recoveries than the alternative.

State law governs. This has been both the strength and the limitation of the ABC process. California permits common-law assignments with minimal judicial supervision. Florida imposes a more rigorous statutory framework. The variation across jurisdictions created inefficiencies that the Uniform Law Commission sought to correct when it promulgated the Uniform Assignment for Benefit of Creditors Act in October 2025. The Act establishes a standardized priority scheme for distributions, clarifies the obligations of assignees, and imposes recording requirements for real property transfers. Individual states must still adopt the Act, a process that will take years to reach completion.

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Two limitations merit emphasis. An ABC does not trigger the automatic stay. Creditors may continue collection efforts during the liquidation process. And because the business transfers all assets to the assignee, there is no mechanism for the debtor to retain ownership or resume operations. The ABC is an instrument of closure, not continuation.

The Decision

Between the workout and the ABC, between continuation and dissolution, the choice depends on a set of variables that resist reduction to formula. The ratio of secured to unsecured debt. The number and disposition of creditors. The viability of the underlying business. The availability of exit financing. The tolerance of the debtor’s principals for risk and for time.

What can be said with certainty is that the cost of inaction exceeds the cost of any of these alternatives. A business that delays restructuring erodes the asset base available to creditors and to itself. Accounts receivable age. Key employees depart. The negotiating position weakens with each quarter of deteriorating performance. The instruments described here exist because the law recognizes a truth that pride resists: the earlier the intervention, the greater the preservation.

Spodek Law Group represents businesses confronting debt obligations that have exceeded their capacity to service. The firm’s attorneys assess the full range of restructuring alternatives and advise on the mechanism best suited to the client’s circumstances, whether that mechanism involves negotiation, court supervision, or orderly liquidation. A consultation with the firm is the first act of restructuring.