ABC vs. Chapter 7 vs. Chapter 11

When a company needs to be wound down, three methods come up over and over: an assignment for the benefit of creditors, Chapter 7, and Chapter 11. Founders, boards, investors, and even some lawyers use these terms almost interchangeably, as if they were three flavors of the same thing. They are not. Making the wrong choice is one of the most expensive mistakes a distressed company can make, and it is avoidable.

I've spent more than two decades doing this work, much of it on exactly this question. CMBG has been involved in more than 150 distressed matters, including advisory situations, sale processes, wind-downs, and consultations, and has handled matters involving more than $2 billion in assets. Most of those situations began with a board asking the same question: do we file bankruptcy, or is there a better way?

Chapter 11 is for restructuring a business. If the company is fundamentally viable and the real problem is the balance sheet, too much debt, a holdout creditor, a creditor race, or expensive contracts that need to be rejected, then Chapter 11, including Subchapter V where available, is the federal tool designed to help a business reorganize and keep operating. Although more expensive than other options, the benefits can be worth the added cost when an out-of-court negotiated restructuring does not succeed.

ABCs and Chapter 7 are both for winding down. Chapter 7 is the federal liquidation scheme, while an ABC is the state-law alternative to Chapter 7. Both processes can be used to liquidate a business, but they differ dramatically in terms of control, speed, cost, and privacy. In California and elsewhere, those differences often favor the ABC.

Chapter 11 is the only one of the three designed to keep a company alive. The company files, immediately gets the automatic stay, stopping collection, foreclosure, and litigation, and proposes a plan to restructure debt while continuing to operate under the control of existing management.

The automatic stay is the headline feature. Only bankruptcy gives the company immediate breathing room. Chapter 11 allows the company to reject burdensome contracts and leases, bind dissenting creditors, and discharge debt while the doors stay open. For a company with a genuine future and contract, lease, or debt problems standing in the way, Chapter 11 can be transformative.

Subchapter V has made Chapter 11 more realistic for some smaller businesses that could not absorb the cost of a traditional Chapter 11. Eligibility depends on statutory requirements and debt limits that adjust periodically, including the bankruptcy dollar amounts published for cases filed on or after April 1, 2025.

Traditional Chapter 11 is expensive, public, slow, and takes too much management attention. Professional fees alone can sink a middle-market company. In many middle-market cases, once debtor's counsel, financial advisors, committee professionals, buyer disputes, lease issues, contested lender matters, and insider issues are included, Chapter 11 can become a seven-figure exercise and can easily exceed $2 million before anyone expected it.

For directors and venture investors, there is also the reality of a public filing. Bankruptcy is highly visible. It can show up in diligence, SEC or public-company disclosures, director questionnaires, lender files, and reputation checks. Sometimes that transparency is necessary and worth it. But no one should pretend it is costless.

Chapter 7 is liquidation bankruptcy. A trustee is appointed, the company's assets are gathered and sold, and proceeds are distributed to creditors in accordance with their legal priority. For a business entity, the company simply ceases to exist at the end. Unlike the case with an individual, a corporation or LLC receives no discharge in Chapter 7. There is no corporate slate wiped clean.

Chapter 7 earns its place when an insolvent business faces real litigation risk, contentious creditors, a creditor race to grab assets, or a need for the automatic stay. A court-supervised trustee imposes order, and the federal process provides a clear and public end. If fights are inevitable, the structure of a federal proceeding can be worth the cost.

For a straightforward California liquidation, an ABC usually does the same job faster, cheaper, more privately, and with one decisive advantage: you choose who runs the process. Because the entity receives no discharge anyway, the benefit many founders think they are buying with Chapter 7 does not exist for the company.

Chapter 7 also does nothing by itself about personal guarantees. Absent active litigation or a genuine need for the stay, the federal process often adds cost and delay without adding value.

An assignment for the benefit of creditors is the state-law alternative to Chapter 7. The company, as assignor, transfers its assets to a neutral assignee selected by the company. The assignee then liquidates or sells the assets and distributes the proceeds to creditors by priority. It is a private contractual and trust-law process, not a federal bankruptcy case, though courts can get involved if a dispute arises.

California has used ABCs heavily since the dot-com collapse, and they remain the default wind-down tool for many venture-backed startups and technology companies. ABCs are an effective tool for acquiring and winding up distressed businesses because the process can avoid the delay and uncertainty of formal bankruptcy and can be particularly useful where fast action and distressed-transaction expertise are needed to capture value.

Control is the single most important difference between an ABC and Chapter 7. In Chapter 7, the court appoints a trustee, someone you do not know, cannot select, and who is handed the company cold, often with no industry expertise. In an ABC, the board chooses the assignee. The right assignee understands the business, can close a sale in days instead of months, knows how to monetize hard-to-value assets like intellectual property and half-built technology, and can preserve a going-concern sale that a generic trustee might break up for scrap.

This control comes at a price. In a Chapter 7 bankruptcy, the company pays a filing fee and the court-appointed trustee must complete the work regardless of whether there are sufficient assets to pay the trustee. By contrast, in an ABC, fees and expenses must either come out of proceeds from the sale of the company's assets, be provided by the company itself, or be advanced by owners, board members, or managers.

An ABC is generally faster and cheaper than Chapter 7 and much faster and cheaper than Chapter 11. It is largely private, which can spare the company, founders, directors, and investors the reputational damage of a public filing. In a pre-packaged ABC, where a buyer has already been lined up, the assignee can sometimes complete a going-concern sale almost immediately after the assignment, preserving value that a slower process would bleed away.

Secured creditors often care about speed and collateral value more than labels. If a lender is undersecured or would see value evaporate in a drawn-out case, the lender may prefer an ABC sale while keeping its lien in place and consenting to the transaction. That does not mean a secured creditor can be ignored. It means the right ABC can be built with secured-creditor consent rather than in opposition to it.

Many venture-backed companies are Delaware corporations, not California corporations. That does not automatically take a California ABC off the table. A California ABC may be appropriate where there is a meaningful California nexus: the assignee is in California, the restructuring is negotiated in California, material assets or creditors are in California, the company has California operations, or the documents use California choice of law.

This is a counsel-driven analysis, and it should be analyzed before the assignment is signed because ABC law varies materially by state. Founders should not assume that a Delaware charter means the only available liquidation paths are Delaware dissolution or federal bankruptcy.

None of these three tools automatically protects a founder on a personal guarantee. A lender can still pursue the guarantor even if the company liquidates through an ABC, files Chapter 7, or reorganizes under Chapter 11.

But guarantees are often negotiable. Lenders may prefer a practical settlement to expensive, public, reputation-sensitive, and uncertain enforcement. The key is to map the guarantees early and negotiate them as part of the overall restructuring strategy, not after the company process is already over.

First, is the business viable if the debt were fixed? If yes, look at Chapter 11 or Subchapter V. If no, you are liquidating, which means ABC or Chapter 7.

Second, do you need an automatic stay right now? Only bankruptcy provides it. If a foreclosure or lawsuit must be stopped today, that pushes toward Chapter 7 or Chapter 11.

Third, how adversarial is the situation? If creditors are fighting, racing for assets, or litigation is inevitable, federal process may be worth the cost. If the wind-down is orderly and cooperative, the ABC usually wins on speed, privacy, and control.

Fourth, where do your secured creditors stand? If the secured lender is underwater, its cooperation may drive the outcome. But that can support an ABC rather than defeat it if the lender prefers a fast sale while preserving its lien.

Answer those questions honestly and the field narrows quickly. A viable company with a debt problem and a foreclosure threat belongs in Chapter 11. A non-viable company facing unavoidable creditor litigation may belong in Chapter 7. A non-viable company with saleable assets, a cooperative secured creditor, and a need for speed often belongs in an ABC.

Chapter 11 saves viable businesses. Chapter 7 and ABC can both wind down non-viable ones. In California, for an orderly liquidation with saleable assets, the ABC usually wins on speed, cost, privacy, and the ability to choose a fiduciary who understands what was built.

But the honest answer depends on the facts: viability, need for the automatic stay, how adversarial the creditors are, where secured creditors stand, and whether personal guarantees are in play.

What never changes is that acting early gives you the full menu. Acting late takes choices away one by one. Understand the tools, answer the hard questions, and get help while there is still room to choose.

About the author. Jim Baer is the Founder and President of CMBG Advisors, a California restructuring and fiduciary advisory firm. He trained as a lawyer at Gibson, Dunn & Crutcher and Katten Muchin Rosenman, helped pioneer the use of assignments for the benefit of creditors for California technology companies, and has been involved in more than 150 distressed matters involving more than $2 billion in assets. He hosts The Puck: Venture Capital and Beyond.