For businesses struggling with debts, a common alternative to bankruptcy filing is the “general assignment for benefit of creditors” or “ABC.” In an ABC, the businesses assets are liquidated outside of the bankruptcy process.
But is an ABC good from a debtor’s standpoint? The best way to really know is to consult with an experienced bankruptcy lawyer who knows the ins and outs of ABCs as well as bankruptcy.
That said, here are 3 things to keep in mind about ABCs:
1. No protection for non-incorporated debtors: A corporation has limited liability. That is, creditors can only go after the assets of the corporation, not the individual business owner. If you’re not incorporated, however, creditors and take actions to go after your personal assets as well as your business assets.
2. Personal Guarantees: In bankruptcy, these would be wiped clean. In an ABC, they still exist. For example, if a debtor uses her home as collateral, in an ABC the home would be liquidated to pay off the creditors. In a bankruptcy filing, however, the home could be protected in certain ways.
3. Collateral < Debt: In an ABC, if the debt is a greater amount than the value of the collateral for a secured loan, then the debtor is still on the hook for the difference. This difference can only be wiped away if the creditor agrees to forgo it. However, in a bankruptcy filing, the creditor doesn’t have any say in how the remaining debt owed is treated.
If you’re considering a general assignment for the benefit of creditors, your best bet is to consult with an experienced bankruptcy attorney in order to help you think through all of the options, strategies and financials.