Assignment for the Benefit of Creditors: An Alternative to Bankruptcy

An ABC is the middle path. It is less expensive than Chapter 11, less public than bankruptcy, and more structured than informal negotiation. For some businesses, it is the right tool when settlement is insufficient and bankruptcy is excessive.

An assignment for the benefit of creditors — commonly called an ABC — is a state-law alternative to federal bankruptcy. The business transfers its assets to an independent assignee, who liquidates the assets and distributes the proceeds to creditors according to a priority structure. The business ceases operations, the debts are resolved to the extent the assets permit, and the remaining unpaid balances are generally discharged. The process is governed by state law and varies by jurisdiction.

How an ABC Differs from Bankruptcy

An ABC is a voluntary, out-of-court process in most states. It does not involve the federal bankruptcy court. It does not trigger the same level of public disclosure. It does not impose the same administrative costs. The assignee — typically an attorney or restructuring professional — manages the liquidation and distribution without the procedural complexity of a Chapter 7 or Chapter 11 proceeding.

The primary difference from a practical standpoint is the absence of the automatic stay. An ABC does not halt collection activity the way a bankruptcy filing does. Creditors who are pursuing enforcement — freezing accounts, filing judgments, seizing assets — are not automatically restrained by the ABC. However, once the assets are transferred to the assignee, they are beyond the reach of individual creditors, and the assignee controls the distribution process.

When an ABC Is Appropriate

An ABC is appropriate when the business is no longer viable as a going concern and the goal is an orderly wind-down rather than a reorganization. If the business cannot generate sufficient revenue to service its debts even after settlement or restructuring, continuing to operate prolongs the loss. An ABC provides a structured process for shutting down, liquidating assets, distributing proceeds to creditors, and resolving the obligations as fully as the assets permit.

An ABC is also appropriate when the cost of Chapter 11 is disproportionate to the size of the estate. A small business with $200,000 in assets and $500,000 in debt may not be able to justify the $50,000 to $100,000 cost of a Chapter 11 proceeding. An ABC can accomplish the same wind-down at a fraction of the cost.

For MCA borrowers specifically, an ABC may be appropriate when multiple MCA obligations, combined with other debts, have rendered the business non-viable, and the owner wants to resolve all obligations through a structured process rather than facing piecemeal collection actions from multiple funders.

Limitations

An ABC does not discharge the business owner’s personal guarantee obligations. If the MCA agreements included personal guarantees — and most do — the personal liability survives the ABC. The business’s debts are resolved through the asset distribution, but the owner’s personal exposure remains. Addressing the personal guarantees requires separate negotiation, settlement, or, if necessary, personal bankruptcy.

An attorney experienced in both MCA disputes and business wind-down alternatives can evaluate whether an ABC is the appropriate tool for the specific situation, and can coordinate the ABC process with the resolution of personal guarantee obligations to achieve the most comprehensive outcome.

The ABC process is also faster than bankruptcy in most cases. A Chapter 7 liquidation can take six months to a year. A Chapter 11 reorganization can take one to three years. An ABC can often be completed in three to six months, depending on the complexity of the asset liquidation and the number of creditors. The speed of resolution is valuable for business owners who want to close one chapter and begin the next.

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In some states, the ABC provides additional protections for the assignor. The transfer of assets to the assignee may be shielded from individual creditor collection actions, providing a degree of protection that approximates — but does not replicate — the automatic stay in bankruptcy. The specific protections vary by state, and an attorney familiar with the ABC process in the relevant jurisdiction can advise on the protections available.

For MCA borrowers specifically, the ABC is most appropriate when the business has reached the end of its operational viability and the goal has shifted from restructuring to orderly wind-down. If the business can still operate and generate revenue, settlement or bankruptcy reorganization may be more appropriate. If the business cannot, the ABC provides a structured, efficient, and less expensive alternative to bankruptcy liquidation.

The ABC is not the right tool for every situation. It is a wind-down mechanism, not a reorganization tool. A business that can be saved through settlement or restructuring should pursue those options. A business that cannot be saved — where the revenue is insufficient, the debts are overwhelming, and the operational viability has ended — may find the ABC to be the most efficient, dignified, and cost-effective way to close the chapter and move forward.