ABC vs. Chapter 7

Start With the Transaction, Not the Filing

Write a one-page sale thesis before comparing procedures: which assets a buyer will purchase, what must stay operational until closing, which parties can block delivery, and who will fund that interval. A warehouse full of unencumbered equipment presents a different problem from software whose value depends on licenses, customer consent, and a departing engineering team.

An assignment is not a negotiated discount on every invoice. Assets pass to an assignee for administration for creditors. Chapter 7 creates a federal estate administered by a trustee. Both can end in asset sales; neither label demonstrates that a buyer, a clean title package, or cash to complete the work exists. U.S. Courts: Chapter 7.

• List the assets by legal owner, location, lien, and transfer restriction.
• Identify the minimum operating bridge: people, premises, insurance, systems, and cash.
• Separate written buyer commitments from indications of interest. Record conditions and expiration dates.
• Build a fallback if the preferred sale does not close. Include the cost of preserving assets during the fallback.

When Creditor Cooperation Changes the Answer

Bankruptcy’s automatic stay is a major distinction when collection pressure threatens an orderly process. It has exceptions, and a creditor can seek relief; do not treat it as a permanent shield. An ABC has no equivalent federal stay simply because an assignment is signed. Ask counsel which state protections and enforceable standstills actually apply. 11 U.S.C. § 362.

For a disputed lien or unwilling counterparty, compare the exact authority needed to deliver the assets. Section 363 can permit a bankruptcy sale free and clear of an interest when a statutory condition is met; it does not promise that every buyer liability disappears. In an ABC, require an asset-by-asset explanation of releases, consent, state-law sale powers, and any court process. 11 U.S.C. § 363.

Chapter 7 is a liquidation process, but the trustee is not categorically barred from operating. Section 721 allows court-authorized operation for a limited period when consistent with orderly liquidation and the estate’s best interest. A proposal that requires continued payroll should identify the requested authority and its funding. 11 U.S.C. § 721.

Neither route is a substitute for a guarantee review. An ABC is not an entity debt discharge; a corporate Chapter 7 debtor also receives no discharge under § 727(a)(1). Inventory guarantees, tax exposure, and indemnities separately instead of assuming a business filing resolves them. 11 U.S.C. § 727.

Worked Scenario: A Buyer and a Short Sale Window

A fictional equipment distributor is closing. Its lender asserts a $400,000 lien against the assets in the proposed sale. For this illustration only, assume the lien amount and use of proceeds are agreed, all sale proceeds are cash, and two feasible sale processes have been budgeted. These figures are invented teaching inputs, not CMBG case results or estimates of typical fees.

The ABC proposal assumes $620,000 of gross proceeds and $70,000 of preservation and process costs. The Chapter 7 proposal assumes $700,000 of gross proceeds and $130,000 of such costs. Subtracting those costs and the assumed lien amount leaves $150,000 and $170,000 respectively, before taxes, other priority claims, reserves, and any unsecured distribution.

The higher-cost process produces $20,000 more under these particular assumptions. That is a reason to investigate its sale-price evidence, not a conclusion that Chapter 7 is generally better. Conversely, a four-week delay that adds $12,000 per week of incremental ABC carrying cost reduces the ABC residual to $102,000 if the purchase price holds. Do not count a carrying cost twice if already included in the original budget.

Before relying on either residual, verify competing liens, taxes, disputed claims, transaction conditions, and who bears a failed-sale expense. The illustration deliberately stops before a creditor waterfall: a positive balance is not money available to distribute pro rata. Run the same sources-and-uses exercise in the Wind-Down Budget Planner.

State Differences That Change the Workplan

California: Jim Baer’s CMBG guide describes a contractual, nonjudicial ABC practice with courts potentially involved in disputes. That practice description is not a promise that every assignment avoids court or that liens vanish. Obtain a California-specific authorization, notice, and sale checklist. Jim Baer / CMBG California guide.

Florida: Chapter 727 puts assignments under circuit-court supervision. Section 727.105 restricts certain enforcement against estate assets in the assignee’s custody but expressly preserves a consensual lienholder’s collateral enforcement exception. A Florida plan must account for that distinction. Florida Chapter 727.

New York: Section 3 specifies written, acknowledged assignments and recording rules, including additional recording for real property in another county. Do not transplant a California transaction checklist without investigating New York’s remaining assignment requirements. New York DCL § 3.

These are examples, not a fifty-state choice-of-law rule. Entity formation, asset location, business operations, secured transactions, and possible bankruptcy venue need separate analysis. Read the California, Florida, and New York guides or find your state.

Prepare for the Route That Does Not Close

An assignment does not make a later bankruptcy impossible. A receiver or assignee may qualify as a custodian with turnover and accounting obligations, subject to statutory exceptions and court decisions. Preserve an inventory, cash ledger, transaction documents, and creditor communications from day one. 11 U.S.C. § 543.

• Buyer risk: document which offer conditions remain open and the next-best disposition.
• Funding risk: identify committed dollars, permitted uses, and the authority to incur additional expense.
• Governance risk: record the approvals needed for the particular entity and transaction.
• Information risk: reconcile the creditor list against the general ledger, litigation, guarantees, and lien search.

Bring the Creditor Worksheet and Annotated Wind-Down Checklist to the first specialist discussion. Ask what fact would change the recommended route and what action is needed before the next deadline.