Executive Summary
When it fits, an ABC is generally faster, less expensive, more private, and more in your control than bankruptcy.
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A Founder's Decision Guide
If you're reading this, it's probably late, the cash is running low, and a payroll run or a creditor deadline is bearing down. Maybe a lender has stopped returning calls, or a single large receivable you were counting on isn't coming. In that moment, filing for bankruptcy can feel like the only door left.
It isn't, and if you have ties to California, it often isn't even the best one.
I've spent more than two decades guiding companies through their hardest financial moments. Around 2001 I was part of the group of California practitioners who helped pioneer the use of the assignment for the benefit of creditors as a wind-down tool for technology companies when the dot-com era collapsed. In the years since, CMBG has been involved in more than 150 distressed matters: advisory engagements, sale processes, wind-downs, and consultations involving more than $2 billion in assets. The single most common thing I tell a founder on a first call is this: you have more options than you think, and the worst mistake is assuming bankruptcy is the only one.
California gives distressed companies a wider set of tools than most founders realize, several of them faster, cheaper, more private, and less damaging to your reputation than a federal bankruptcy filing. But each tool fits a specific situation, and choosing the wrong one can cost you money, control, and in some cases expose you to personal liability you could have avoided.
This guide walks through the realistic options: out-of-court workouts, the assignment for the benefit of creditors (ABC), receivership, Chapter 11, Chapter 7, and ordinary dissolution, with honest framing about when each one makes sense and, just as importantly, when it doesn't. This is educational, not legal advice; every distressed company should get counsel before acting. But you'll make far better use of that counsel if you walk in already understanding the landscape.
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The Threshold Question: What Is The Goal?
Before comparing mechanisms, name your goal. In my experience, distressed founders are usually trying to accomplish one of three very different things, and they point to different tools.
A clean wind-down. The business isn't going to make it, and you want to shut it down in an orderly way that treats creditors fairly, limits your exposure and your directors' exposure, and lets you move on.
Preserving the operating business as a going concern. You believe the company is fundamentally viable and the problem is the balance sheet, a liquidity crunch, or a one-off problem like a lawsuit or unfavorable judgment, rather than the underlying enterprise.
Maximizing creditor recovery. Often to protect your reputation and your ability to raise money or do business again, even if the entity itself doesn't survive.
These goals overlap, but the dominant one shapes the answer. A viable business with too much debt points toward a workout or Chapter 11. A non-viable business with saleable assets points toward an ABC or a sale. A non-viable business with no real assets and personal guarantees in play points toward bankruptcy or careful dissolution. Get clear on the goal first; the mechanism follows. When founders skip this step, they tend to reach for the most familiar word, bankruptcy, instead of the right tool.
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Option 1: Out-of-Court Workout
A workout is simply a negotiated agreement with your creditors outside of any court process. You and your lenders or vendors agree to new terms: extended payment schedules, reduced principal, temporary forbearance, a debt-for-equity swap, or some combination, and you keep operating.
When it makes sense
A workout is usually the best first move when the business is fundamentally viable and the problem is temporary: a liquidity gap, a one-time loss, or a covenant breach you can cure. It works best when you have a manageable number of creditors who have reason to cooperate, typically because they'd recover less in a bankruptcy or liquidation than under your proposed terms. Sophisticated lenders frequently prefer a workout precisely because formal insolvency proceedings are slow and erode value. A workout is private, preserves relationships, and is dramatically cheaper than any court process.
When it doesn't
Workouts fall apart when you have too many creditors to coordinate, or when even one critical creditor refuses to play along. Because a workout is consensual, it has no mechanism to bind a holdout. A single secured lender or aggressive vendor can blow up an otherwise sensible deal, which is exactly the problem the bankruptcy cramdown power exists to solve. A workout also can't stop a creditor who has already begun exercising remedies: if a secured lender is moving to foreclose or has frozen your accounts, you may need the breathing room only a court-ordered stay provides. And if the business simply isn't viable, a workout just delays the inevitable while burning cash and goodwill.
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Option 2: Assignment for the Benefit of Creditors (ABC)
This is the tool I know best, and for good reason: in California it is one of the most widely used wind-down mechanisms, especially in the startup world. An ABC is a state-law alternative to Chapter 7 liquidation. The company, the assignor, transfers all of its assets to a neutral third party, the assignee, who liquidates or sells them and distributes the proceeds to creditors according to their legal priority. It's a private contractual and trust-law process, not a court proceeding, though courts can become involved if a dispute arises.
An ABC is an effective tool for acquiring and winding up distressed businesses precisely because it can avoid the delay and uncertainty of formal bankruptcy, and it is especially useful where fast action and distressed-transaction expertise are needed to capture value. That matches the practical reality of most of these situations: you are dealing with a melting ice cube, and speed and the right fiduciary are not details. They are often the difference between a recovery and nothing.
When it makes sense
An ABC shines when the company is insolvent and won't reorganize, but still has assets worth selling: intellectual property, equipment, inventory, or an operating unit a buyer wants. Because the assignee can often move quickly and quietly, an ABC is a favorite in California for venture-backed startups and technology companies that have run out of runway. The board wants to wind down responsibly, hand the keys to a professional, sell the assets, sometimes to a pre-identified buyer in what's called a pre-packaged ABC and sometimes to existing stakeholders bidding in an arm's-length auction, and limit director exposure without the cost, delay, and public spectacle of a federal bankruptcy. It is generally faster and cheaper than Chapter 7.
There is a second, quieter benefit that boards often overlook. Even when the assets turn out to be worth little, the ABC protects the board by transferring fiduciary responsibility to the assignee, who is then charged with running a fair process to maximize recovery for creditors. The directors are no longer the ones deciding who gets paid and in what order; an independent fiduciary takes on this role.
The point most founders miss: you choose who runs it. In a Chapter 7, the court appoints a trustee you don't know and can't select, someone who is handed your company cold and rarely has industry expertise in what you built. In an ABC, the board and stockholders select the assignee. That single difference is, in my experience, the most consequential strategic advantage of the whole process. The right assignee understands your industry, can move on a sale in days rather than months, knows how to monetize esoteric assets like IP and partially built technology, and can preserve a going-concern sale that a generic trustee would liquidate for scrap. The assignee is the trustee-equivalent in an ABC, and the wrong fiduciary, or a random one, can destroy recovery value before anyone notices. Choosing your fiduciary is not a formality; it is the decision that most often determines how much creditors actually recover.
Secured creditors are not necessarily an obstacle
Founders often assume a secured lender will block an ABC. Frequently the opposite is true. Secured creditors usually care about speed and collateral value more than labels. If a lender is undersecured, or would watch value evaporate in a drawn-out case, it may well prefer a fast ABC sale while keeping its lien in place and consenting to the transaction. I have seen sophisticated bankers, including at major institutions, favor ABCs when the facts fit. That doesn't mean a secured creditor can be ignored. It means the right ABC is often built with secured-creditor consent rather than in opposition to it.
A related worry I hear is whether a disgruntled creditor can drag the company into bankruptcy anyway by filing an involuntary petition. The risk is real but manageable. Where an ABC is already proceeding in an orderly, transparent way and appears to be serving creditors' interests, an assignee may have strong arguments for dismissal or abstention under Bankruptcy Code section 305. It is not impossible, but it is usually less likely than founders fear when the ABC is being run properly.
When it doesn't, and the discipline it demands
An ABC is a poor fit when secured debt exceeds asset value and the secured creditor won't cooperate. The lien follows the collateral, and there may be nothing left to administer for everyone else. It offers no automatic stay, so it won't halt litigation the way bankruptcy does. Because it depends on cooperation, a determined creditor pursuing its own remedies can derail it. And it isn't a tool for businesses hoping to survive. By definition, you're liquidating.
An ABC also requires discipline; you cannot be cute. It demands a fair sale process, credible buyer outreach, appropriate notice, careful handling of priority claims, and a fiduciary who understands the assignee acts for creditors. Private does not mean sloppy. If insiders try to use an ABC to bury assets or paper a sweetheart deal, they are asking for trouble.
Two structural limits are worth naming up front, because they can take an ABC off the table regardless of how well it otherwise fits. First, an ABC generally requires both board authorization and shareholder or member approval because it transfers substantially all, or effectively all, of the company's assets. Unlike a bankruptcy filing, which generally can be authorized by the board without a shareholder vote, an ABC can require owner approval under applicable corporate or LLC law. That approval requirement is real, and it can slow the process if the cap table is fractured or investors are not aligned. Second, executory contracts and leases cannot be assigned in an ABC without the counterparty's consent, and the ipso facto default clauses that bankruptcy disarms remain enforceable here. If your deal depends on transferring key leases or contracts and you cannot get consent, an ABC may not be the right vehicle. And because the process is nonjudicial, there is no court order blessing the sale. A buyer who needs that certainty may prefer a bankruptcy sale.
Takeaway
The takeaway: For an orderly California wind-down, an ABC is often the gold-standard state-law alternative to Chapter 7. If Chapter 11 is the platinum tool when a company truly needs a federal stay, plan, and cramdown, the ABC is the practical tool when the company cannot be saved but the assets still can. The conditions matter: an orderly process, saleable assets, proper approvals, and a cooperative environment. Where they do not hold, one of the other tools in this guide will serve you better. Equally important, the board hands the liquidation process to an independent fiduciary whose job is to run a fair process and maximize recovery for creditors.
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Option 3: Receivership
A receivership puts a court-appointed neutral, the receiver, in control of some or all of a company's assets or operations. Unlike the other tools here, a receivership is usually imposed rather than chosen: a creditor, often a secured lender, or another stakeholder petitions the court to appoint a receiver, frequently in connection with a foreclosure or a contentious dispute.
When it makes sense
Receivership is common with real-estate-heavy entities and with single troubled assets, where a lender wants a neutral party to take control, preserve value, and manage or sell the property while litigation plays out. It can also make sense as a tool to stabilize a business mid-dispute, for example, in shareholder deadlock or fraud situations, when no one trusts the incumbent management to run things fairly. A court-supervised receiver brings legitimacy and a defined process. It also can be used when the secured creditor is not cooperative and you want court authority to sell free and clear of liens.
When it doesn't
If you're a founder hoping to control how the wind-down or restructuring unfolds, receivership is rarely what you'd pick. It cedes control to an outsider answerable to the court and often to the creditor who requested the appointment. It can be expensive, and it's generally not a comprehensive solution for a company with many creditors and a tangled balance sheet; it's better suited to discrete assets or specific disputes. For a broad insolvency, an ABC or a bankruptcy usually does more.
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Option 4: Chapter 11 Reorganization
Chapter 11 is the federal bankruptcy process built for reorganizing a business rather than liquidating it. The company files, gets the protection of the automatic stay, which stops collection, foreclosure, and litigation, and proposes a plan to restructure its debts while it continues operating. Smaller businesses may qualify for Subchapter V, a streamlined, less expensive version designed to make reorganization realistic for companies that can't bear the cost of a traditional Chapter 11. And although expensive, Chapter 11 is often the right tool when an out-of-court negotiated restructuring doesn't succeed.
When it makes sense
Chapter 11 is the right tool when the business is genuinely viable but the balance sheet isn't: too much debt, an underwater lease, contracts that need renegotiating, or a holdout creditor a workout can't bind. The automatic stay is its superpower: it instantly stops a foreclosure or aggressive collection and gives you room to breathe. The plan process can bind dissenting creditors through cramdown, reject burdensome contracts and leases, and discharge debt while the company continues to operate. For a company with a real future and a debt problem standing in the way, Chapter 11, especially Subchapter V for smaller firms, can be transformative.
When it doesn't
Traditional Chapter 11 is expensive, public, slow, and brutal on 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 approach or exceed $2 million before anyone expected it. For directors and venture investors there is also the simple reality that a bankruptcy filing is visible. It can surface in diligence, disclosures, director questionnaires, lender files, and reputation checks. Sometimes that transparency is necessary and worth it; no one should pretend it is costless. Critically, Chapter 11 only works if there is a viable business to reorganize. The most expensive mistake is the free-fall filing: no real plan, no financing, which burns cash and fees and converts to liquidation anyway. If the company cannot be saved, Chapter 11 is usually the costliest path to the same place an ABC or Chapter 7 reaches faster.
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Option 5: Chapter 7 Liquidation
Chapter 7 is federal liquidation bankruptcy. A trustee is appointed, the company's assets are gathered and sold, and the proceeds are distributed to creditors by priority. For a business entity, the company simply ceases to exist at the end; unlike an individual, a corporation or LLC does not receive a discharge in Chapter 7. There is no corporate slate wiped clean.
When it makes sense
Chapter 7 can be appropriate for an insolvent business when there is meaningful creditor pressure, potential disputes, a creditor race to grab assets, or a genuine need for the automatic stay. A court-supervised trustee imposes order, and the federal process provides a clear, legally defined, public end. If fights are inevitable, the structure of a federal proceeding can be worth the cost. Chapter 7 also can be the route when the company truly cannot fund an ABC up front and the estate does not have assets that can reliably be sold to cover fees and expenses. The trustee has to take the case, and if there are insufficient assets to cover fees and expenses, the trustee bears that risk.
When it doesn't
For many companies with a nexus to California, an ABC accomplishes essentially the same liquidation outcome with more speed, lower cost, more privacy, and, as I stressed above, the ability to choose the person running the process. That is why founders, shareholders, and directors here so often prefer it. Because a business entity gets no discharge in Chapter 7, the benefit founders sometimes imagine, wiping the slate clean, does not apply to the company itself, and Chapter 7 does nothing by itself about personal guarantees. With a court-appointed trustee, the company gets the fiduciary assigned to the case. Some trustees are excellent, but the company does not choose them and they may not understand the assets, technology, customer relationships, or sale opportunity. In an ABC, the company can do diligence and select an assignee it trusts to move quickly, run a fair process, and maximize value. Absent active litigation or a real need for the stay, the federal process tends to add cost and delay without adding value.
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Option 6: Dissolution / Wind-Down
Dissolution is the ordinary corporate housekeeping process of formally ending the company under state law: the board and shareholders or members approve winding up, the company pays or provides for its debts, distributes any remainder, and files dissolution paperwork with the state.
When it makes sense
Dissolution is the right tool for a solvent or near-solvent shutdown, when the company can actually pay what it owes, or has enough assets to do so, and you simply want to close cleanly. A startup that has decided to stop, has cash to cover its obligations, and wants to return any remaining funds to investors is a classic candidate. It's straightforward and inexpensive when the numbers work.
When it doesn't
Dissolution is dangerous to attempt as a substitute for insolvency proceedings when the company can't pay its creditors. Once a company is insolvent, directors owe heightened duties to creditors, and distributing assets to shareholders ahead of creditors, or winding down carelessly, can expose directors and officers to personal liability. If there isn't enough to pay debts, an ABC, Chapter 7, or Chapter 11, depending on viability, is the responsible route, not a quiet dissolution. I have seen well-meaning founders create personal exposure for themselves simply by closing in the wrong order.
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California Nexus and Choice of Law
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 here, material assets or creditors are here, 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 liquidation paths are Delaware dissolution or federal bankruptcy.
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The Personal Guarantee and Director Liability Wildcard
Two issues cut across every option above and deserve their own attention, because founders routinely overlook them until it's too late.
Personal guarantees. If you personally guaranteed a loan, a lease, or a line of credit, none of the company-level tools here automatically protects you. The company can liquidate through an ABC, dissolve, or even file Chapter 7, and the creditor can still come after you personally on the guarantee. But guarantees are often negotiable. A lender may prefer a practical settlement to expensive, public, and uncertain enforcement. The key is to map your guarantees early and negotiate them as part of the overall restructuring strategy, not after the company's process is already over.
Director and officer liability. Once a company is insolvent or near it, the fiduciary duties of its directors expand to include creditors, not just shareholders. Certain obligations, unpaid payroll, and especially trust fund payroll taxes, can attach to individuals personally regardless of the entity's fate. Distributing assets to insiders, or favoring some creditors over others in the wrong order, can also create personal exposure. This is the single biggest reason to bring in experienced help early: the order in which you do things, and who gets paid when, can be the difference between a clean exit and personal liability. This is also where an ABC quietly helps: it transfers that fiduciary burden to an independent assignee.
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A Decision Framework
You can narrow the field quickly by asking a few questions in order.
First, is the business viable? Is there a real enterprise worth saving if the debt were fixed? If yes, you're in workout or Chapter 11 territory. If no, you're in liquidation territory, and the question becomes ABC, Chapter 7, or dissolution.
Second, what's your secured position? If a secured lender's debt exceeds your asset value, that lender's cooperation may drive the outcome. But, as noted above, an undersecured lender often prefers a fast ABC sale, so this can support an ABC rather than defeat it.
Third, how many creditors are there, and are any of them holdouts? A handful of cooperative creditors favors a workout; a holdout or a crowd favors a court process that can bind dissenters.
Fourth, do you need an automatic stay to stop a foreclosure or lawsuit right now? Only bankruptcy provides it; an ABC, receivership, and dissolution do not.
Fifth, have you signed personal guarantees? If so, factor your personal exposure in separately. The company's path may not be your path.
The table below summarizes how the six options compare across the dimensions that matter most.
| Option | Relative cost | Speed | Who controls it | Automatic stay | Discharges debt | Public / private |
|---|---|---|---|---|---|---|
| Out-of-court workout | Low | Fast | You and your creditors | No | By agreement only | Private |
| Assignment for benefit of creditors (ABC) | Low-moderate | Fast | Assignee selected through required board and, where applicable, shareholder/member approval process | No | No entity discharge; buyer typically does not assume unsecured liabilities unless expressly assumed | Largely private |
| Receivership | Moderate-high | Varies | Court / requesting creditor | No (court orders apply) | No | Public |
| Chapter 11 (incl. Subchapter V) | High (lower for Sub V) | Slow | Company, under court oversight | Yes | Yes (via plan) | Public |
| Chapter 7 | Moderate | Moderate | Court-appointed trustee | Yes | No (for entities) | Public |
| Dissolution | Low | Fast | Board / owners | No | No | Public filing |
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When to Bring in Help, and What to Ask
Bring in a restructuring professional or insolvency attorney the moment you can see a cash cliff coming, not after you've missed payroll or a creditor has sued. The most valuable options, negotiating leverage, an orderly ABC, a Subchapter V plan, all depend on time you still have, and they shrink as the situation deteriorates. The earlier I get a call, the more room there is to actually choose; the latest calls are the ones where the choice has already been made by circumstances.
When you talk to an advisor, ask which of these paths fits your specific facts and why; what your personal exposure is on guarantees and payroll taxes; what order you should pay or stop paying creditors to avoid director liability; and what the realistic cost and timeline of each route looks like for a company your size. A good advisor will give you an honest read on viability rather than steering you toward the most expensive process. If someone reaches for the biggest, most expensive hammer before understanding your facts, get a second opinion.
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The Bottom Line
There is rarely a single correct answer to what do I do now. The honest answer is that it depends on whether the business is viable, where your secured creditors stand, how many creditors you have, whether you need a stay, and what you've personally guaranteed. What's consistent is that acting early expands your options and acting late collapses them. Bankruptcy is one tool among several, and for many California companies a workout, an ABC, or a clean dissolution is faster, cheaper, and less damaging. Understand the landscape, name your goal, and get help while you still have 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.
This guide is for general educational purposes and is not legal advice. Insolvency decisions carry significant legal and personal-liability consequences and depend heavily on your specific facts. Consult a qualified California restructuring or bankruptcy attorney before acting.