Alternatives to Chapter 7 Bankruptcy for Insolvent Hawaii Businesses: Assignment for the Benefit of Creditors
An Assignment for the Benefit of Creditors (ABC) is a private, state-level alternative to federal Chapter 7 bankruptcy in Hawaii. It allows an insolvent business to transfer its assets to an independent assignee for liquidation, often providing a faster, quieter, and less expensive way to shut down operations and pay off debts.
What is an Assignment for the Benefit of Creditors (ABC)?
When a Hawaii business is drowning in debt and completely out of cash, the first thought is usually a federal Chapter 7 bankruptcy. However, corporate bankruptcy is highly public, extremely rigid, and heavily overseen by federal judges. In Hawaii, there is a powerful state-level alternative governed largely by common law principles: the Assignment for the Benefit of Creditors (ABC). In an ABC, the insolvent company (the assignor) voluntarily transfers all of its assets to a trusted third-party fiduciary (the assignee). This assignee's sole job is to liquidate the business assets and distribute the proceeds fairly to the creditors. If your Hawaii business is facing insolvency, we highly encourage you to browse our directory to find a local commercial attorney who can execute a smooth ABC.
When to Choose an ABC Over Chapter 7
An ABC is generally favored by business owners who want to avoid the stigma and loss of control associated with federal bankruptcy court. In a Chapter 7 case, the court appoints a random bankruptcy trustee. In an ABC, the business owner and their attorney get to select the assignee-usually a specialized financial firm or liquidation attorney who understands the nuances of the local Hawaii market. ABCs are also completely private contracts, meaning you do not have to testify at public 341 creditor meetings. It is often faster and yields a higher return on assets because the assignee can sell the business as a 'going concern' rather than holding a fire sale of chopped-up assets.
How the Assignee Liquidates Hawaii Assets
Once the legal trust agreement is signed, the assignee takes absolute legal title to the company's property. This includes physical inventory in a Honolulu warehouse, real estate in Hilo, intellectual property, and even pending lawsuits against third parties. The assignee will typically hire local auctioneers or brokers to sell the assets. Because the assignee is a fiduciary to the creditors, they are legally bound to maximize the value of the estate. The assignee acts entirely independently of the former business owners.
Dealing with Secured vs. Unsecured Creditors
Just like in bankruptcy, the hierarchy of who gets paid first matters immensely in an ABC. Secured creditors-such as a local Hawaii bank that holds a mortgage on your commercial building or a UCC-1 lien on your equipment-maintain their secured status. The assignee must either get the secured creditor's consent to sell the asset or pay off the lien entirely from the sale proceeds. Unsecured creditors (like food vendors or marketing agencies) are grouped together. After the secured debts and the assignee's administrative fees are paid, the remaining cash is distributed to unsecured creditors on a pro-rata basis.
Handling Personal Guarantees
A critical nuance of the ABC process is how it affects the business owners personally. Most small business owners in Hawaii sign personal guarantees for commercial leases in places like Waikiki or for SBA loans. While the ABC liquidates the corporate assets to pay down these debts, an ABC does NOT automatically wipe out your personal liability. If the liquidation does not cover the entire bank loan, the bank can still sue you personally. Your attorney must aggressively negotiate with these creditors, offering the ABC as a good-faith effort in exchange for a release of your personal guarantee.
The Step-by-Step ABC Process in Hawaii
Because Hawaii does not have a comprehensive, rigid statutory code for ABCs like some other states, the process relies heavily on tightly drafted common law contracts and precedents, such as those established in early territorial cases like In re Estate of Akana, 11 Haw. 420 (HI Supreme Court 1898).
Step 1: Drafting the Trust Agreement
Your attorney will draft a comprehensive General Assignment document. This contract irrevocably transfers all corporate assets to the chosen assignee. Your board of directors or LLC members must officially vote to approve this action.
Step 2: Notice to Creditors
The assignee immediately takes control of the business, changes the locks on the facility, and sends a formal notice to all known creditors, informing them of the assignment and instructing them on how to submit their financial claims.
Step 3: Liquidation and Distribution
The assignee sells off the assets over a period of months. Once all property is liquidated, the assignee reviews all submitted creditor claims, approves or denies them, and mails out the final pro-rata distribution checks.
How Much Does it Cost?
An ABC is generally funded directly out of the assets being liquidated, minimizing out-of-pocket costs for the insolvent business owner.
| Assignee Fee | Usually 3% to 10% of the gross liquidated assets |
| Attorney Setup Fees | $5,000 to $15,000+ to draft agreements |
| Asset Appraisal / Auctioneer Fees | Varies (deducted from asset sales) |
Timeline for an ABC
The initial decision and drafting of the assignment documents can happen in as little as 1 to 2 weeks. Once the assignee takes over, the speed of the liquidation depends on the assets. Selling simple restaurant equipment might take 60 days, while selling commercial real estate could take 6 to 9 months. The entire ABC process is usually fully wrapped up and distributed within 6 to 12 months.
Frequently Asked Questions (FAQ)
Does an ABC stop lawsuits against my business?
Unlike Chapter 7 bankruptcy, an ABC does not have an automatic federal stay that instantly halts lawsuits. However, because the corporation no longer owns any assets (they belong to the assignee), creditors usually pause their lawsuits because there is nothing left for them to seize.
Do I need creditor consent to do an ABC?
You do not need the consent of your unsecured creditors to execute an ABC. However, practically speaking, you need cooperation from your major secured creditors (like your primary bank), otherwise, they may try to foreclose on the assets before the assignee can sell them.
Can an ABC discharge corporate debt?
No. Corporations do not receive a debt 'discharge' in an ABC or in a Chapter 7. After the ABC pays out whatever cash it can, the remaining debts still technically exist, but the corporation is left as an empty, asset-free shell.
Who typically acts as an Assignee in Hawaii?
Assignees are usually specialized financial restructuring firms, local business attorneys, or dedicated corporate liquidators who have strong fiduciary track records and experience maximizing asset value in the islands.
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