Companies face many daily risks as they run businesses in the economic marketplace. These risks may create risky situations where companies cannot continue normal operations. If your business is struggling with debt, filing for bankruptcy is not the only way. Hence, consider other debt relief solutions that fit your financial situation.
For businesses burdened with debts, the two common alternatives to bankruptcy are:-
- An assignment for the benefit of creditors
- An out-of-court debt restructuring or corporate workout.
Assignment for the Benefit of Creditors
An assignment for the benefit of creditors is that a financially distressed debtor uses to liquidate their business assets to creditors. But, it is not for the rehabilitation or reorganization of the business. This alternative is a good choice if you want to bypass bankruptcy proceedings.
The debtor or assignor transfers management, control, and equitable property title and assets to an autonomous assignee. The role of assignees is close to bankruptcy trustees as they liquidate the business assets and apply the sales proceeds to the creditors following the law. Creditors are paid the necessary amount, assignee fees are paid, and any funds or interest left are returned to the business owners and shareholders.
Typically, state courts supervise the proceedings rather than federal bankruptcy courts because state laws differ regarding assignments.
The Process of an Assignment
The assignor or debtor should officially write that it wishes to assign assets to an assignment estate. The business selects the assignee, but creditors can also impact the selection of an assignee. A company that wants to experience this process should choose a reputed assignee to gain creditors’ trust.
The business should file a list of assets and liabilities, including the creditors’ details. Then, the assignee informs the creditors mentioned on the list that a particular debtor of theirs has filed for an assignment. The assignee also establishes a deadline for the filing of claims by creditors.
Assignments don’t have an automatic stay injunction commonly filed after bankruptcy.
A business will likely avoid intruding upon creditors who want to gather or repossess its assets after an assignment. After all, taking action against an entity after an assignment is futile because the management has already assigned its assets to an assigned estate.
Advantages and Disadvantages of Assignment for the Benefit of Creditors
The benefit of an assignment for the benefit of creditors is that the sale of the assets is likely to occur efficiently and without lengthy waits. To confirm that creditors do not have a claim on the property, the assignee will send the buyers a bill of sale. The assignee also has the provision to sell the assets without receiving a court order from the state court.
On the other hand, the disadvantage of an assignment is that it’s hard for the assignee to compel the transfer of contracts and leases without the consent of the lessors or other parties to the agreement.
Out-of-Court or Corporate Workouts
In an out-of-court or corporate workout, the debtor and creditors reach a consensual agreement to solve a debt issue without filing a case in court. However, you must ensure that your creditors agree to your proposal. A corporate workout may not work if one or two creditors deny participating. Before suggesting a workout plan, decide if the business can rebound. In an out-of-court or corporate workout, the management must repay its creditors via an equity infusion, new financing, or future cash flow.
Getting Legal Advice for the Workout Process
Hiring an attorney with knowledge of business reorganizations is important, especially if cash flow is tight and the creditors are beginning to intervene with business operations. A business bankruptcy lawyer can help you through the entire procedure and mediate between you and dissatisfied creditors. The management should hire a turnaround consultant to help with the process. A turnaround advisor helps in the preparation of the financial projections of the firm, formulation, negotiation, and undertaking of the workout plan. They can also convey with your creditors.
Advantages and Disadvantages of an Out-of-Court or Corporate Workout
The advantage is that an out-of-court or corporate workout can prevent creditors from filing a lawsuit. In exchange, they get full or partial payment of the outstanding debt. It also prevents you from paying for the costs of bankruptcy proceedings.
The disadvantage of a workout is that you cannot compel a creditor to accept a corporate workout proposal. In a bankruptcy, there’s a chance to force a dissenting creditor to settle with a plan.
Individuals and businesses struggling with debts can also hire a Licensed Insolvency Trustee. Hiring a LIT is appropriate for avoiding business as well as personal bankruptcy. A LIT provides counseling to people and helps them make a conclusion when dealing with their debt problems. Contact Dana MacRae, Licensed Insolvency Trustee, for more details.