Bankruptcy vs. Assignment for the Benefit of Creditors: What Lawyers and Advisors Should Understand
When a business experiences financial distress, filing for bankruptcy isn’t always the only or best option. For many companies, some alternatives offer a more efficient and less costly way to liquidate or wind down operations.
At Dunn Law, P.A., our attorneys understand the complexities business owners face during times of financial uncertainty. With decades of combined experience in bankruptcy, creditors’ rights, and fiduciary services, our team routinely advises clients on the best course of action, whether through federal bankruptcy or state-level options like Assignments for the Benefit of Creditors (ABC). Knowing the key differences between these options can help attorneys and advisors better guide their clients toward the right solution.
What Is an Assignment for the Benefit of Creditors (ABC)?
An Assignment for the Benefit of Creditors is a voluntary, state-regulated process that allows a financially troubled business to transfer its assets to an independent third party, known as an assignee, who liquidates those assets and distributes proceeds to creditors.
Unlike bankruptcy, which is governed by federal law, ABCs follow state statutes. In Florida, this process is outlined in Chapter 727 of the Florida Statutes, which establishes rules for assignee appointments, creditor notifications, and payment priorities. Because ABCs occur outside federal court, they are typically faster, less formal, and more cost-effective than bankruptcy.
How the ABC Process Works
An ABC generally follows these steps:
- Voluntary Assignment - The company transfers its assets to a neutral fiduciary, often an attorney or accountant.
- Creditor Notification - The assignee notifies all known creditors and allows time for creditors to file claims.
- Asset Liquidation - The assignee sells the business’s assets through an orderly process designed to preserve value.
- Distribution of Proceeds - The resulting funds are distributed to creditors in accordance with state-mandated priorities.
- Final Accounting - After liquidation and distribution, the assignee files a final report, closing the process.
Benefits and Common Scenarios
An ABC can be an appealing option for companies seeking an efficient and lower-cost resolution. Common benefits include:
- Speed - The process typically concludes much faster than bankruptcy.
- Cost savings - Legal and administrative expenses are usually lower.
- Flexibility - State-specific rules allow for tailored approaches to both continued operations and liquidation.
ABCs are often used by startups, closely held companies, and small to midsize businesses that cannot feasibly reorganize.
How ABCs Differ from Bankruptcy Proceedings
While both processes aim to resolve debts and repay creditors, they differ in structure, oversight, and outcomes.
Oversight and Jurisdiction
An ABC is governed by state law, meaning each jurisdiction has its own procedures. In Florida, Chapter 727 sets out detailed requirements for the process. Bankruptcy, however, is a federal proceeding handled by U.S. Bankruptcy Courts under the Bankruptcy Code, creating a uniform system nationwide.
Who Oversees the Process
In an ABC, a private assignee manages liquidation and distribution with limited court involvement. Bankruptcy, in contrast, is court-supervised from start to finish. Depending on the chapter filed, a judge may appoint a trustee or allow management to operate as a debtor-in-possession.
Control and Operations
Under Chapter 11 bankruptcy, management may continue running the business while pursuing a reorganization plan.
In a Chapter 7 bankruptcy, absent extraordinary circumstances and specific relief from the bankruptcy court, the business ceases to operate, and a trustee is appointed and immediately assumes control to liquidate the assets of the business.
In an ABC, the assignee immediately assumes control of all assets. The ABC statute provides the flexibility to allow the assignee to continue operations for a short time without the need for further court approval, and can extend that time, often to facilitate a sale as a going concern. However, in most ABCs, the business typically ceases operations either before or shortly after commencement of the case.
Impact on Stakeholders
Both systems prioritize creditor repayment, but ABCs can vary by state, while bankruptcy procedures are standardized. An ABC does not discharge debts or personal guarantees, whereas bankruptcy may provide a discharge and opportunity for a financial reset. Shareholders in both processes rarely receive funds until all creditors are paid in full.
Advantages and Risks
An ABC offers speed, confidentiality, and flexibility in going-concern and asset sales, making it a strong choice for companies seeking liquidation with the optionality of preserving value as a going concern. Bankruptcy provides federal protections such as the automatic stay, which halts collection actions, and can include debt discharge or reorganization options.
However, ABCs carry risks. Creditors can challenge the process if state requirements are not met, and there is no automatic stay to prevent lawsuits, though creditors are not permitted to proceed against the assignee or the assignment estate’s assets, with the exception of consensual lienholders. Businesses that hope to restructure or continue operating generally benefit more from bankruptcy.
The Attorney’s Role in Guiding Clients
Attorneys are essential in helping clients determine whether bankruptcy or an ABC aligns best with their goals. Legal counsel should evaluate the company’s financial position, recovery potential, and long-term strategy before recommending a path forward.
If the business can reorganize, bankruptcy may offer more preferable protections. If the objective is a quick, cost-effective wind-down with maximum recovery for creditors, an ABC — particularly under Florida’s Chapter 727 — is probably the more practical solution.
Throughout the process, attorneys must ensure fiduciary compliance, represent creditors seeking repayment, and advise assignees or purchasers involved in liquidation.
Choosing the Right Path Forward
Both bankruptcy and Assignments for the Benefit of Creditors serve important roles in business dissolution and debt resolution, but they are not interchangeable.
For Florida businesses in financial distress, a tailored legal strategy is essential. The attorneys and fiduciaries at Dunn Law, P.A., are uniquely positioned to guide clients through these complex choices and administer assignment estates. With a deep understanding of both federal bankruptcy proceedings and Florida's ABC statutes, our team offers customized solutions to help clients minimize risk and preserve value during challenging transitions.
To learn more about how Dunn Law, P.A. can assist your business, feel free to reach out anytime. Let our experienced team help you determine the most strategic path forward.