Legal Definitions - assignment for the benefit of creditors

Assignment for the Benefit of Creditors

An assignment for the benefit of creditors is a legal process where a financially distressed individual or company (the debtor) voluntarily transfers all their assets to an independent third party (the assignee or trustee). This assignee then liquidates (sells off) these assets in an organized manner and distributes the proceeds among the debtor's creditors. Any funds remaining after all creditors have been paid are returned to the debtor.

This procedure is typically governed by state law and serves as an alternative to federal bankruptcy proceedings. A crucial distinction is that, unlike bankruptcy, an assignment for the benefit of creditors generally does not discharge the debtor from any remaining unpaid debts if the liquidated assets were insufficient to cover all obligations. The debtor remains liable for any outstanding balances unless creditors specifically agree to forgive them.

Examples:

• Example 1: Small Business Wind-Down
  Sarah owns a small artisanal bakery that has been struggling financially for months. Despite her best efforts, the business is no longer sustainable, and she has accumulated significant debt to suppliers, her landlord, and a small business loan. Sarah wants to close the bakery responsibly and ensure her creditors are paid fairly, but she wants to avoid the complexity and public nature of federal bankruptcy.
  She decides to execute an assignment for the benefit of creditors. Sarah transfers all the bakery's assets—ovens, mixers, inventory, and even the remaining leasehold improvements—to a professional assignee. The assignee then sells these items, collects any outstanding receivables, and uses the funds to pay Sarah's creditors proportionally. If, after selling everything, there's still a portion of the small business loan unpaid, Sarah would remain personally liable for that remaining debt, as this process does not automatically discharge it.
• Example 2: Individual with Diverse Assets
  Mr. Henderson, a retired investor, made several poor investment decisions that led to substantial personal debt. He owns a valuable art collection, a vacation home, and a diversified stock portfolio, but his liquid assets are insufficient to cover his immediate obligations. He wants to ensure his creditors are treated equitably and his assets are managed professionally during the liquidation process, rather than facing multiple lawsuits or forced sales.
  Mr. Henderson chooses an assignment for the benefit of creditors. He formally transfers ownership of his art, vacation home, and stock portfolio to an appointed assignee. The assignee then methodically sells these assets, often seeking the best market value, and distributes the proceeds among Mr. Henderson's various creditors, such as credit card companies and personal loan providers. If the total proceeds don't cover all his debts, Mr. Henderson would still be responsible for the remaining balances.
• Example 3: Tech Startup Facing Insolvency
  A promising tech startup, 'InnovateCo,' failed to secure its next round of funding and is now insolvent, unable to pay its employees, vendors, and angel investors. The founders want to wind down the company's operations in an orderly and transparent manner, maximizing recovery for their creditors while avoiding the stigma and legal costs associated with a Chapter 7 bankruptcy filing.
  InnovateCo's board of directors decides to make an assignment for the benefit of creditors. They transfer all the company's remaining assets—including office equipment, intellectual property rights, and any cash reserves—to a professional assignee. The assignee then manages the sale of these assets, potentially licensing the IP or selling the equipment, and distributes the resulting funds to the employees for unpaid wages, vendors, and investors. Any debts that remain after the liquidation would still technically be owed by InnovateCo, though practically, an insolvent company often has no further means to pay.