Operating a business is hard work. Keeping a business open for the long haul is even harder. According to the U.S. Bureau of Labor Statistics, about 20% of small businesses close within their 1st year of operations. Around 50% of small businesses close by their 5th year of operations. In the end, only 33% of small businesses are operational by their 10th year, while the other 66% have already closed shop.
Businesses that have closed shop will want to know the best way to liquidate and wind down what remains of their company and its assets. They will also need to figure out how to address their debts. Chapter 7 bankruptcy for businesses is the most well-known liquidation proceeding. However, bankruptcy may not necessarily be the best option for small business liquidation. Assignment for the Benefit of Creditors, on the other hand, is a state law alternative to federal bankruptcy which offers small businesses many advantages over Chapter 7.
How does an Assignment for the Benefit of Creditors Work?
An Assignment for the Benefit of Creditors is sometimes referred to as an “ABC.” It’s a court-supervised liquidation proceeding that takes place in state court rather than federal court. An ABC is very similar to Chapter 7 bankruptcy for businesses in many ways. However, an ABC offers small businesses the unique ability to choose the fiduciary who is in charge of the liquidating. This person is called the “Assignee”. The small business sends a “Deed of Assignment” to the Assignee, giving the Assignee the legal title to the business and all of its assets. The Assignee may obtain authorization for the small business to continue to operate during the liquidation. The Assignee ultimately sells the business as a turnkey operation or sells of individual assets. The sale proceeds are distributed to the small business’ creditors.
How does a Chapter 7 Bankruptcy for Businesses Work?
Unlike in an ABC, a small business that files for Chapter 7 bankruptcy cannot choose the person who liquidates its business and assets, who is called a “Chapter 7 Trustee.” Instead, a Chapter 7 Trustee is assigned to the bankruptcy case by the Office of the United States Trustee, which is part of the United States Department of Justice. The Chapter 7 Trustee does not have the power to allow the small business to continue to operate during the Chapter 7 bankruptcy. The Chapter 7 Trustee must sell the small business and/or its assets. So while a Chapter 7 bankruptcy is similar to an ABC, the small business does not have as much control over who liquidates the business, and cannot operate the small business during the liquidation.
Chapter 7 Bankruptcy for Businesses vs. an ABC Liquidation – Which is Best?
Choosing the best way to liquidate your business depends heavily on the specific circumstances surrounding the operations of your business. However, in our experience, an ABC is generally the best way for small businesses to liquidate. ABCs give small businesses a degree of control over their liquidation that does not exist in Chapter 7 bankruptcy. Also, there is generally more up front expense involved in Chapter 7 bankruptcy for businesses as opposed to an ABC. Finally, a small business that has filed an ABC has not filed a bankruptcy and, in some contexts, that may be an important distinction.
Filing an ABC with Middlebrooks Shapiro
Counsel experienced in ABCs, like the capable attorneys at Middlebrooks Shapiro, can assist small businesses with the ABC process. Our services include analyzing whether an ABC is a viable option, considering any and all pitfalls relevant to the small business’ circumstances, and preparing and transmitting a Deed of Assignment to the small business’ chosen Assignee. In all instances, small businesses are encouraged to retain competent counsel to assist them throughout the process.