An Assignment for the Benefit of Creditors (ABC) is a state law insolvency procedure where the company transfers all assets to an independent assignee who liquidates them and distributes proceeds to creditors. An ABC can close in weeks. Chapter 7 is a federal bankruptcy proceeding overseen by a trustee appointed by the court, with formal creditor claims processes that typically take six months to over a year. ABCs are faster and more private but lack the automatic stay and other federal bankruptcy protections.
An ABC is initiated when the company's board of directors authorizes the execution of an assignment agreement transferring all company assets to an assignee, typically a firm that specializes in managing ABC estates. The assignee takes possession of the assets, notifies creditors, evaluates and liquidates the assets, adjudicates creditor claims, and distributes proceeds according to the priority rules of the applicable state law. In California, where most Silicon Valley startups are operationally based, the ABC process can be completed in three to six months for a straightforward estate. Chapter 7 begins with the filing of a petition in federal bankruptcy court, after which a trustee is appointed to administer the estate. The Chapter 7 process typically takes six to twelve months or longer, particularly if there are contested claims or adversary proceedings. Gurpreet Bal advises that the faster timeline of an ABC is often the decisive factor for startup boards because the value of technology assets depreciates rapidly, and a prolonged wind-down process reduces the recovery available to creditors.
ABCs are generally less expensive than Chapter 7 because they avoid federal court filing fees, trustee fees set by statutory schedules, and the administrative overhead of the federal bankruptcy process. An ABC assignee charges fees negotiated with the debtor, typically as a percentage of assets recovered. However, ABCs lack the creditor protection mechanisms of bankruptcy and may not bind all creditors, which can create complications if a creditor refuses to participate.
ABCs are generally less expensive than Chapter 7 proceedings. The assignee's fees and expenses in an ABC are paid from the estate's assets as a cost of administration, but are typically lower than the combined cost of a Chapter 7 trustee, debtor's counsel, and the various professionals retained during a bankruptcy case. Chapter 7 proceedings involve court filing fees, US Trustee quarterly fees, and the administrative overhead of federal court supervision including scheduled hearings, court reporting, and compliance filings. In Gurpreet Bal's experience advising startups on wind-down options, the total cost of an ABC for a typical early-stage technology company is roughly 30% to 50% lower than a comparable Chapter 7 liquidation, preserving more of the estate's value for distribution to creditors.
In both an ABC and Chapter 7, IP and technology assets are sold through a process designed to maximize creditor recovery. Chapter 7 allows sales free and clear of liens and interests under Section 363 of the Bankruptcy Code, providing buyers with court-approved title free of most claims. ABC asset sales also transfer clean title, but without federal court approval, buyers may require more extensive representations and warranties from the assignee to address title concerns.
For many failed startups, the intellectual property and technology assets are the most valuable assets in the estate. Both ABCs and Chapter 7 provide mechanisms for selling these assets, but the processes differ. In an ABC, the assignee can conduct a private sale or auction of the IP assets without court approval, allowing for faster execution and potentially attracting buyers who are reluctant to participate in a public bankruptcy process. In Chapter 7, asset sales are conducted under Section 363 of the Bankruptcy Code, which requires court approval, notice to creditors, and an opportunity for competing bids. The Section 363 process provides the buyer with the benefit of a court order approving the sale free and clear of liens and encumbrances, which provides greater certainty of title. Gurpreet S. Bal advises that when the company's IP is the primary asset and a potential buyer has been identified, an ABC often allows for a faster and more discreet sale process, while Chapter 7 may be preferable when the buyer needs the additional protections of a court-approved sale.
SAFEs are typically treated as equity, not debt, in a wind-down scenario. This means SAFE holders rank below all creditors — secured, unsecured, and even general trade payables — in the payment waterfall. In most startup insolvencies, there are insufficient assets to pay creditors in full, so SAFE holders receive nothing. This treatment surprises many SAFE investors who may not have understood that the instrument's equity-like nature makes them last in line.
In both an ABC and Chapter 7, creditor claims are paid in order of priority. Secured creditors are paid first from the proceeds of their collateral. Administrative claims including the assignee's or trustee's fees and expenses are paid next. Unsecured creditors including trade creditors, landlords, and holders of convertible notes classified as debt are paid pro rata from remaining assets. Equity holders including common stockholders and SAFE holders whose instruments are classified as equity receive distributions only after all creditors have been paid in full, which rarely occurs in a startup wind-down. The classification of SAFEs as debt or equity in the wind-down context is a critical determination that affects the recovery of early investors. Gurpreet Bal advises founders and boards to analyze the terms of outstanding SAFEs and convertible instruments early in the wind-down process to determine their likely classification and to set appropriate expectations with investors about the probable recovery.
An ABC is preferable when the company has a willing buyer for its assets and needs speed and privacy, when the company's creditors are cooperative and unlikely to challenge the process, and when the company wants to avoid the stigma and public disclosure requirements of federal bankruptcy. Chapter 7 is preferable when the company needs the automatic stay to stop creditor actions, when asset title disputes require federal court resolution, or when creditors are likely to be adversarial.
The choice between ABC and Chapter 7 depends on several factors. An ABC is generally preferred when the company has a relatively simple creditor profile, the primary assets are IP and technology that can be sold quickly, there are no significant threatened or pending lawsuits requiring the automatic stay protection of bankruptcy, and the board wants to minimize cost and timeline. Chapter 7 is preferred when the company needs the protection of the automatic stay to halt creditor collection actions or pending litigation, when the company's assets include real property leases or executory contracts that require rejection under the Bankruptcy Code, when the assignee's ability to avoid fraudulent transfers or preferential payments under state law is more limited than the trustee's avoidance powers under the Bankruptcy Code, or when the complexity of the creditor composition requires federal court supervision. Gurpreet S. Bal advises boards to evaluate both options with counsel before committing to a wind-down path, as the choice is difficult to reverse once initiated.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.