Better than Bankruptcy?
58 Pages Posted: 11 May 2016 Last revised: 15 Sep 2016
Date Written: May 10, 2016
According to many in the bankruptcy field, small business debtors are increasingly turning to state debtor-creditors laws as an alternative to federal bankruptcy relief. One particularly popular state law is the assignment for the benefit of creditors. The conventional wisdom is that these procedures provide a state law alternative to liquidate a business.
This article reports the results of an original empirical study that challenges this conventional wisdom. Gathering data from every assignment for the benefit of creditors in a major metropolitan area over a three year period, this study shows that debtors and their secured creditors are using these procedures not just to liquidate a business but also to sell the business as a going concern, free and clear of interests. These going concern sales, particularly when sold to insiders of the debtor, are actually more like corporate reorganization than liquidation.
These findings raise important questions about the role of these state law alternatives and the way they interact with the federal bankruptcy laws. These questions, in turn, may help inform debates about reforming the bankruptcy laws, particularly as applied to small business debtors.
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