Legal Lingo: Assignment for Benefit of Creditors

Understanding the language of the law is the first step to understanding the law, and in such a complex profession with such a wide array of terms, it’s easy to feel as if you’re visiting a foreign country just by walking into a courthouse or lawyers office. The term “Assignment for the Benefit of Creditors” or an ABC has been in the news quite a bit lately. From the collapse of Butler and Hosch in mid-May to discount luxury travel site site Luxury Link, and retailer Body Central it seems as if this “bankruptcy alternative” is becoming a mainstream term. So let’s crack it open and have a look at what this term really means.

The ABCs of an ABC

An Assignment for Benefit of Creditors is an analog to the more widely understood Chapter 7 Bankruptcy liquidation. It is a voluntary transfer of the debtor’s property in trust to a third entity for liquidation and satisfaction of the creditors’ claims. The trustee will then liquidate all nonexempt property and satisfy the creditors as much as possible. This is not a one size fits all plan, and it may not be suitable for certain companies in financial straits that will require a bankruptcy. If the company is in dire financial straits, with no lender willing to finance, no liquidity, and no cash flow, or if filing a Chapter 7 would not generate the best payouts for creditors, or if the debtor wants to avoid a Chapter 7 bankruptcy altogether, an ABC might just be a speedier and more agreeable way out for all parties.

1. Company A transfers all property including rights, deeds, titles, and control of all assets and independent third entity who we will call the Trustee. They then walk away and have no further say in the disposition of their former property.
2. The trustee liquidate the assets and distributes the monies to Company A’s creditors.
3. Secured creditors – those who have a right to repossess or foreclose on collateral – are paid from the proceeds and are relieved of the time and expense of selling their collateral interest.
4. Unsecured creditors- those that lend money without collateral such as credit cards – must follow a formal claims process called “proof of claims” which allows the trustee to confirm and control unsecured liabilities.

Very often a trustee specializing in ABC’s will be more efficient in the disposition of property than a court appointed trustee, especially when one is selected who has experience in this area of law. Assignment for Benefit of Creditors is less costly, less public, and often much speedier to resolve than your average bankruptcy. It is never easy to lose a business that you may have spent a lifetime building, but by waiting and hoping you may actually be making your situation worse.

At Van Horn Law Group, we understand all of the complex processes of relieving financial distress and helping our clients resolve their debts.