ABC or what is also known as a general assignment for the benefit of creditors is a private process designed to liquidate a business outside of bankruptcy. As the recession presses on, some creditors are encouraging troubled but honest debtors to liquidate their business outside of bankruptcy using ABCs. But some business debtors are finding that a general assignment for the benefit of creditors is just that, beneficial to creditors and often not so beneficial to business debtors. Let’s take a look at a few things you should know:
- ABCs won’t protect business debtors who are not incorporated. In an ABC the creditors in the case will be able to go after the personal assets of a business owner who does not have a corporation. In bankruptcy, both sole-proprietors and corporations are shielded from aggressive collections actions of creditors.
- ABCs will not wipe out any personal guarantees that the debtor made on their business debt. For example, if a debtor used his home as collateral for a business loan, a general assignment for the benefit of creditors might allow creditors to liquidate the home to pay the creditors. In a bankruptcy, the debtor’s home would be protected if it was his homestead and creditors would leave the bankruptcy empty handed if there were not enough assets to repay them.
- In an ABC, if a debt is more than the value of the collateral used to secure it, the creditor has to approve the ABC before it can go forward. If they were in a bankruptcy, they would have no power to approve or disapprove of a bankruptcy based on the value of assets. If there aren’t enough assets to pay all the creditors then the creditors could find themselves at a loss during bankruptcy. But the upside is that the bankruptcy debtor would be free from having to repay the debts.