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Are there alternatives to filing for business bankruptcy?

On Behalf of | Aug 22, 2022 | Bankruptcy |

A variety of factors may lead a company to consider filing bankruptcy. A business concept might not have taken off or thrived as well as initially expected. A company may have experienced a recent downturn in business due to changes in the market. There may also be a situation whereby someone recently inherited a failing business. 

In each of these situations, filing bankruptcy may seem like the optimal solution to a company’s debt. While that is the right choice in many cases, some alternatives may provide much-needed debt relief without filing for bankruptcy. 

Receivership alternative to declaring bankruptcy

A receivership involves creditors, known as receivers, taking over a debtor’s property. The court supervises this re-possession until the bankruptcy trustee ultimately decides what should happen with those assets. When a receivership involves a business entity, the onus falls on the receiver, or creditor, to either liquidate or continue running the company as their own during this phase. A new Commerical Real Estate Receivership Act went into effect in early 2022 in Florida, expanding the rights of receivers in situations like these.

Composition agreements between debtors and creditors

Creditors are sometimes willing to enter into a composition agreement with their debtors. These agreements involve a creditor recording a debtor’s outstanding balance as satisfied in exchange for receiving a payment that is less than the original loan amount. Creditors unwilling to agree to the composition may instead opt to tack on the full amount of their outstanding debt to other assets that the debtor owns.

Assignments for the benefit of creditors

Debtors may transfer a large share of any property they own to an adjustment bureau trustee or credit manager association as an assignment for the benefit of creditors. This process liquidates assets to settle any outstanding debts. Any proceeds from the sale are distributed among creditors as determined by the court. 

In some situations, a company’s assets may not generate full market value. In these cases, business owners may owe the difference between the balance owed and the sale price. However, some jurisdictions’ laws forbid creditors from claiming a debtor owes an outstanding balance after agreeing to assignments for the benefit of creditors. 

When a company is trying to manage large debts, several forms of bankruptcy are available as options. Similarly, multiple alternatives exist for businesses that wish to release their debt without filing for bankruptcy. Each option offers advantages and disadvantages, so it is vital to research the path best suited for your situation.