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Alternatives to Bankruptcy in California
Small business owners in financial distress may believe that bankruptcy is their only option. However, alternatives to bankruptcy do exist and may result in a more favorable outcome.
April 02, 2010 /Money PR News/ -- Alternatives to Bankruptcy in California
The current economy has many small businesses struggling to remain viable. California specifically has been significantly impacted; according to the Los Angeles Times, in the 12 months ending September 30, 2009, California small business bankruptcies increased 81 percent over the prior year. This number may not even reflect the total number of troubled small businesses, as some small business owners file individually rather than seeking protection for the business.
Small business owners balancing despair in their financial situation and stress over creditor calls may believe their only option is to file for protection under Chapter 7 or Chapter 11 bankruptcy. However, alternatives to bankruptcy do exist and may result in a more beneficial outcome in certain circumstances.
Assignment for the Benefit of Creditors
Essentially, an Assignment for the Benefit of Creditors allows a struggling company to sell its assets to a separate company while shielding the company purchasing the assets from liability for outstanding debts.
The struggling company assigns all of its property to an intermediary known as an assignee. This property may include inventory, equipment, contract rights, accounts receivable, causes of action, and all other real or personal property. Leasehold interests can also be transferred with the landlord's consent.
The assignee then acts as a fiduciary for the creditors; the assignee is responsible for assessing the market value of the assets and obtaining the best price possible for these assets. After negotiations, the assignee sells the property and uses the proceeds to pay the creditors.
What Are the Benefits to an Assignment?
A general assignment can facilitate the sale of the assets of a business, including a sale to a friendly party. This can allow a debt-laden business to be sold to a new or existing company with creditor recovery limited to the proceeds of the sale. The sale can be "turn key" avoiding the delays and uncertainties of a bankruptcy sale. The assignee enjoys certain protections for the business. For example, under section 1954.1 of the California Civil Code, the assignee can remain in leased premises for 90 days upon timely rent payments, notwithstanding any lease provision defining the lessee's insolvency as a condition of breach. This aids in the preservation of business assets as the assignee prepares to liquidate. The transfer of assets to the assignee is generally exempt from state fraudulent conveyance statutes.
Assignees are exempted from the notice period required by the Bulk Sales division of the Uniform Commercial Code as adopted in California. Companies in the business of selling stock from inventory are generally required to give creditors advance notice of any sale that is not in the ordinary course of business and that transfers over half of the company's inventory. When required, this can result in delay and diminution of company assets. Using an assignee, the company can transfer more than half of the company's inventory without this delay.
The powers granted to the assignee also make it possible to preserve and even augment the assets available for liquidation, often ultimately resulting in a greater payoff to creditors than they would receive in a bankruptcy.
Business Debt Workout
Some business owners want to stay in business. After significant investments of time, money, effort and knowledge, they know that their business will thrive if it can reduce or delay payments on current outstanding debts that may have been incurred at startup or to carry the business through a difficult time.
In an informal workout, the business and one or more creditors agree that the business should receive a discount or deferment in payments, without resort to the bankruptcy courts. Through a mutually-negotiated modification, the business and one or more creditors agree that the creditor will accept partial or late payment in full satisfaction of an outstanding debt.
Creditors may be amenable to reduced or late payment if they believe that they will be receiving more than they would in a bankruptcy or assignment, or if they wish to continue an ongoing business relationship with the debtor.
Can a Business Retain Its Assets in a Workout?
Whether and what terms creditors will be willing to accept in a business debt workout vary. However, businesses may be able to protect assets more effectively than in a bankruptcy. Since the terms are mutually negotiated and the parties are not constrained by the statutory limitations of the Bankruptcy Code, the debtor has more flexibility in prioritizing the assets which are critical to the business as a going concern.
Contact an Attorney
Some small business owners have built their company to a point where it would be viable as a going concern but for the company's debt. Some small business owners simply want to close the door and limit their future liability. Whether you are looking to sell or close your small business, an experienced attorney can discuss your bankruptcy alternatives with you and help you find an effective resolution.
Article provided by Weintraub & Selth, A Professional Corporation
Visit us at www.wsrlaw.net
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