{"id":123,"date":"2014-09-17T00:42:05","date_gmt":"2014-09-17T00:42:05","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=123"},"modified":"2015-04-20T18:18:13","modified_gmt":"2015-04-20T18:18:13","slug":"13-5-alternatives-to-bankruptcy","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/13-5-alternatives-to-bankruptcy\/","title":{"raw":"Alternatives to Bankruptcy","rendered":"Alternatives to Bankruptcy"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Understand that there are nonbankruptcy alternatives for debtors who cannot pay their bills in a timely way: assignment for benefit of creditors, compositions, and receiverships.<\/li>\r\n\t<li>Recognize the reasons why these alternatives might not work.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch30_s05_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Alternatives to Bankruptcy: Overview<\/h2>\r\nBankruptcy is a necessary thing in a capitalist economic system. As already noted, without it, few people would be willing to take business risks, and the economy would necessarily operate at a lower level (something some people might not think so bad overall). But bankruptcy, however \u201cenlightened\u201d society may have become about it since Victorian days, still carries a stigma. Bankruptcy filings are public information; the lists of people and businesses who declare bankruptcy are regularly published in monthly business journals. Bankruptcy is expensive, too, and both debtors and creditors become enmeshed in significantly complex federal law. For these reasons, among others, both parties frequently determine it is in their best interest to find an alternative to bankruptcy. Here we take up briefly three common alternatives.\r\n\r\nIn other parts of this book, other nonbankruptcy creditors\u2019 rights are discussed: under the Uniform Commercial Code (UCC), creditors have rights to reclaim goods sold and delivered but not paid for; under the UCC, too, creditors have a right to repossess personal property that has been put up as collateral for the debtor\u2019s loan or extension of credit; and mortgagees have the right to repossess real estate without judicial assistance in many circumstances. These nonbankruptcy remedies are governed mostly by state law.\r\n\r\nThe nonbankruptcy alternatives discussed here are governed by state law also.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch30_s05_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Assignment for Benefit of Creditors; Compositions; Receivership<\/h2>\r\n<div id=\"mayer_1.0-ch30_s05_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Benefit of Creditors<\/h3>\r\nUnder a common-law <span class=\"im_margin_term\"><span class=\"im_glossterm\">assignment for the benefit of creditors<\/span><\/span>, the debtor transfers some or all of his assets to a trustee\u2014usually someone appointed by the adjustment bureau of a local credit managers\u2019 association\u2014who sells the assets and apportions the proceeds in some agreed manner, usually pro rata, to the creditors. Of course, not every creditor need agree with such a distribution. Strictly speaking, the common-law assignment does not discharge the balance of the debt. Many state statutes attempt to address this problem either by prohibiting creditors who accept a partial payment of debt under an assignment from claiming the balance or by permitting debtors to demand a release from creditors who accept partial payment.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch30_s05_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Composition<\/h3>\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">composition<\/span><\/span> is simply an agreement by creditors to accept less than the full amount of the debt and to discharge the debtor from further liability. As a contract, composition requires consideration; the mutual agreement among creditors to accept a pro rata share of the proceeds is held to be sufficient consideration to support the discharge. The essential difference between assignment and composition lies in the creditors\u2019 agreement: an assignment implies no agreement among the creditors, whereas a composition does. Not all creditors of the particular debtor need agree to the composition for it to be valid. A creditor who does not agree to the composition remains free to attempt to collect the full sum owed; in particular, a creditor not inclined to compose the debt could attach the debtor\u2019s assets while other creditors are bargaining over the details of the composition agreement.\r\n\r\nOne advantage of the assignment over the composition is that in the former the debtor\u2019s assets\u2014having been assigned\u2014are protected from attachment by hungry creditors. Also, the assignment does not require creditors\u2019 consent. However, an advantage to the debtor of the assignment (compared with the composition) is that in the composition creditors cannot go after the debtor for any deficiency (because they agreed not to).\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch30_s05_s02_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Receivership<\/h3>\r\nA creditor may petition the court to appoint a receiver; <span class=\"im_margin_term\"><span class=\"im_glossterm\">receivership<\/span><\/span> is a long-established procedure in equity whereby the receiver takes over the debtor\u2019s property under instructions from the court. The receiver may liquidate the property, continue to operate the business, or preserve the assets without operating the business until the court finally determines how to dispose of the debtor\u2019s property.\r\n\r\nThe difficulty with most of the alternatives to bankruptcy lies in their voluntary character: a creditor who refuses to go along with an agreement to discharge the debtor can usually manage to thwart the debtor and her fellow creditors because, at the end of the day, the US Constitution forbids the states from impairing private citizens\u2019 contractual obligations. The only final protection, therefore, is to be found in the federal bankruptcy law.\r\n<div id=\"mayer_1.0-ch30_s05_s02_s03_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nBankruptcy is expensive and frequently convoluted. Nonbankruptcy alternatives include assignment for the benefit of creditors (the debtor\u2019s assets are assigned to a trustee who manages or disposes of them for creditors), compositions (agreements by creditors to accept less than they are owed and to discharge the debtor from further liability), and receivership (a type of court-supervised assignment).\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>What is an assignment for benefit of creditors?<\/li>\r\n\t<li>What is a composition?<\/li>\r\n\t<li>What is a receivership?<\/li>\r\n\t<li>Why are these alternatives to bankruptcy often unsatisfactory?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Understand that there are nonbankruptcy alternatives for debtors who cannot pay their bills in a timely way: assignment for benefit of creditors, compositions, and receiverships.<\/li>\n<li>Recognize the reasons why these alternatives might not work.<\/li>\n<\/ul>\n<\/div>\n<div id=\"mayer_1.0-ch30_s05_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Alternatives to Bankruptcy: Overview<\/h2>\n<p>Bankruptcy is a necessary thing in a capitalist economic system. As already noted, without it, few people would be willing to take business risks, and the economy would necessarily operate at a lower level (something some people might not think so bad overall). But bankruptcy, however \u201cenlightened\u201d society may have become about it since Victorian days, still carries a stigma. Bankruptcy filings are public information; the lists of people and businesses who declare bankruptcy are regularly published in monthly business journals. Bankruptcy is expensive, too, and both debtors and creditors become enmeshed in significantly complex federal law. For these reasons, among others, both parties frequently determine it is in their best interest to find an alternative to bankruptcy. Here we take up briefly three common alternatives.<\/p>\n<p>In other parts of this book, other nonbankruptcy creditors\u2019 rights are discussed: under the Uniform Commercial Code (UCC), creditors have rights to reclaim goods sold and delivered but not paid for; under the UCC, too, creditors have a right to repossess personal property that has been put up as collateral for the debtor\u2019s loan or extension of credit; and mortgagees have the right to repossess real estate without judicial assistance in many circumstances. These nonbankruptcy remedies are governed mostly by state law.<\/p>\n<p>The nonbankruptcy alternatives discussed here are governed by state law also.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch30_s05_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Assignment for Benefit of Creditors; Compositions; Receivership<\/h2>\n<div id=\"mayer_1.0-ch30_s05_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Benefit of Creditors<\/h3>\n<p>Under a common-law <span class=\"im_margin_term\"><span class=\"im_glossterm\">assignment for the benefit of creditors<\/span><\/span>, the debtor transfers some or all of his assets to a trustee\u2014usually someone appointed by the adjustment bureau of a local credit managers\u2019 association\u2014who sells the assets and apportions the proceeds in some agreed manner, usually pro rata, to the creditors. Of course, not every creditor need agree with such a distribution. Strictly speaking, the common-law assignment does not discharge the balance of the debt. Many state statutes attempt to address this problem either by prohibiting creditors who accept a partial payment of debt under an assignment from claiming the balance or by permitting debtors to demand a release from creditors who accept partial payment.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch30_s05_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Composition<\/h3>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">composition<\/span><\/span> is simply an agreement by creditors to accept less than the full amount of the debt and to discharge the debtor from further liability. As a contract, composition requires consideration; the mutual agreement among creditors to accept a pro rata share of the proceeds is held to be sufficient consideration to support the discharge. The essential difference between assignment and composition lies in the creditors\u2019 agreement: an assignment implies no agreement among the creditors, whereas a composition does. Not all creditors of the particular debtor need agree to the composition for it to be valid. A creditor who does not agree to the composition remains free to attempt to collect the full sum owed; in particular, a creditor not inclined to compose the debt could attach the debtor\u2019s assets while other creditors are bargaining over the details of the composition agreement.<\/p>\n<p>One advantage of the assignment over the composition is that in the former the debtor\u2019s assets\u2014having been assigned\u2014are protected from attachment by hungry creditors. Also, the assignment does not require creditors\u2019 consent. However, an advantage to the debtor of the assignment (compared with the composition) is that in the composition creditors cannot go after the debtor for any deficiency (because they agreed not to).<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch30_s05_s02_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Receivership<\/h3>\n<p>A creditor may petition the court to appoint a receiver; <span class=\"im_margin_term\"><span class=\"im_glossterm\">receivership<\/span><\/span> is a long-established procedure in equity whereby the receiver takes over the debtor\u2019s property under instructions from the court. The receiver may liquidate the property, continue to operate the business, or preserve the assets without operating the business until the court finally determines how to dispose of the debtor\u2019s property.<\/p>\n<p>The difficulty with most of the alternatives to bankruptcy lies in their voluntary character: a creditor who refuses to go along with an agreement to discharge the debtor can usually manage to thwart the debtor and her fellow creditors because, at the end of the day, the US Constitution forbids the states from impairing private citizens\u2019 contractual obligations. The only final protection, therefore, is to be found in the federal bankruptcy law.<\/p>\n<div id=\"mayer_1.0-ch30_s05_s02_s03_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>Bankruptcy is expensive and frequently convoluted. Nonbankruptcy alternatives include assignment for the benefit of creditors (the debtor\u2019s assets are assigned to a trustee who manages or disposes of them for creditors), compositions (agreements by creditors to accept less than they are owed and to discharge the debtor from further liability), and receivership (a type of court-supervised assignment).<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>What is an assignment for benefit of creditors?<\/li>\n<li>What is a composition?<\/li>\n<li>What is a receivership?<\/li>\n<li>Why are these alternatives to bankruptcy often unsatisfactory?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-123\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":89,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-123","chapter","type-chapter","status-publish","hentry"],"part":771,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/123","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":4,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/123\/revisions"}],"predecessor-version":[{"id":1095,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/123\/revisions\/1095"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/771"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/123\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=123"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=123"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=123"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=123"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}