Assignment for the Benefit of Creditors

An assignment for the benefit of creditors is a process by which a distressed debtor transfers all of his or her assets to a trustee or assignee who liquidates them for the benefit of creditors. This procedure is governed by state law and varies from state to state, as do the requirements for filing claims. It serves as an alternative to a bankruptcy liquidation, but does not provide significant benefit where assets are fully or greatly secured.

Assignment Process

Assignments for the benefit of creditors are controlled usually by statute or court rules of procedure, or both. The debtor signs a document that effectively transfers all assets to an assignee. The document can be in the form of a deed, bill of sale, encumbrance, or combination of the above, but is usually in a form that has been used in the appropriate jurisdiction. The assignee is usually required to be someone unaffiliated with the debtor.

Duties of the Assignee

The duties of the assignee include the following:

• Investigate the assets of the debtor to determine their appropriate value
• Provide for an orderly and fair liquidation of the tangible assets of the debtor
• Collect all accounts receivable, notes receivable, and other debts due to the debtor
• Investigate any causes of action which may be available to the debtor and prosecute them in the name of the debtor, if appropriate
• Investigate the prior acts and conduct of the debtor

Role of the Creditor

In most situations, creditors are notified of the procedure for filing claims. Creditors should always file a claim as promptly as possible in accordance with the procedures outlined. Creditors should make certain that the assignee has investigated the activities of the debtor prior to the assignment process to make sure that there are not preferences, fraudulent transfers, or improper activities that should be remedied either by the assignee or a bankruptcy trustee.

Advantages and Disadvantages

An advantage of the assignment proceeding is the speed with which it is handled, the lack of mandated structure, and a less expensive method of asset distribution. A disadvantage is that any three creditors who have undisputed unsecured claims that exceed $10,000 collectively may file an involuntary bankruptcy petition under Chapter 7 of the Bankruptcy Code if they are not satisfied with the assignment proceeding.

(Source: Manual of Credit and Commercial Laws, edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore)