Bankruptcy is not the only door, and for most small businesses it is not the best one. Chapter 11 reorganization costs, even under the streamlined Subchapter V provisions, routinely consume tens of thousands in legal and administrative fees before a single creditor receives a dollar. The process announces distress to customers, vendors, and competitors in a manner that erodes the goodwill the business spent years accumulating. For many owners, the alternatives that exist outside the courthouse produce better outcomes at lower cost, with less collateral damage to relationships and reputation.
Assignment for the Benefit of Creditors
An assignment for the benefit of creditors transfers the company’s assets to a neutral third party, the assignee, who liquidates them and distributes the proceeds to creditors according to their legal priority. The process resembles a Chapter 7 liquidation but operates under state law, moves faster, and costs substantially less. In October 2025, the Uniform Law Commission promulgated the Uniform Assignment for Benefit of Creditors Act, an effort to bring statutory consistency to a process that has long varied by jurisdiction. California, Florida, and Illinois have permitted ABCs for decades, and the mechanism has gained traction as bankruptcy costs have risen.
The assignee functions like a trustee but without the oversight of a federal bankruptcy judge. For the business that has concluded operations are no longer viable, this path preserves value by avoiding the administrative machinery of the bankruptcy court. The creditors receive distributions on a timeline that months of Chapter 7 proceedings would extend.
Composition Agreement
A composition agreement is a contract between the debtor and its creditors in which the creditors agree to accept less than what they are owed in exchange for certainty and speed. The agreement requires near unanimous participation. One dissenting creditor can collapse the arrangement. But when it holds, the composition permits the business to continue operating, to reduce its aggregate debt burden, and to avoid the public record that accompanies a bankruptcy filing.
The composition succeeds when every creditor in the room concludes that the alternative, litigation and delay, produces less than what the composition offers today.
With the majority of American corporate debt falling below ten million dollars, and bankruptcy costs continuing to increase, the economics of composition agreements have become more attractive than they were a decade ago.
Out of Court Workout
Where a composition agreement reaches all creditors, a workout targets the financial ones. The business negotiates directly with its bank lenders, its MCA funders, and its equipment lessors to defer payments, extend terms, or reduce principal. The trade creditors, the vendors who supply inventory and materials, remain outside the negotiation and continue to be paid on existing terms. This selectivity is the workout’s principal advantage. The vendor relationships that keep the business operational remain undisturbed.
The workout demands a credible projection of the business’s ability to service restructured obligations. Lenders who have seen the projections fail once will not extend the same courtesy again. The window for this option closes after the first missed commitment.
State Court Receivership
A receivership places the business under the control of a court appointed receiver who manages operations, preserves assets, and executes a disposition strategy. Unlike bankruptcy, which operates under federal law with national jurisdiction, receiverships are creatures of state courts and proceed under the procedural rules of the appointing jurisdiction. The receiver can operate the business, sell assets free and clear of certain liens, and wind down affairs with a degree of judicial oversight that provides creditors with confidence in the process.
Secured creditors sometimes prefer receivership to bankruptcy because it affords them greater influence over the disposition of their collateral. The process tends to move faster, and the receiver’s fees, while not insignificant, do not carry the layered administrative costs of a Chapter 11 estate.
UCC Article 9 Sale
When the distressed business’s principal creditor holds a security interest in substantially all assets, Article 9 of the Uniform Commercial Code provides a mechanism for that creditor to conduct a commercially reasonable sale of the collateral. The sale can encompass the entire business as a going concern. The procedure operates without court involvement unless challenged, which makes it the fastest and least expensive disposition method available.
The limitation is significant. The sale must be commercially reasonable, a standard that invites litigation from junior creditors or the debtor. And the purchasing entity, which is often the secured creditor itself through a credit bid, acquires the assets but not necessarily the contracts, licenses, or relationships that gave those assets their value as part of an operating enterprise.
Voluntary Dissolution with Negotiated Wind Down
Not every business in financial distress seeks to survive. For the owner who has determined that the enterprise has reached the end of its useful life, a voluntary dissolution conducted under state corporate or LLC statutes permits an orderly cessation. The business sells its remaining assets, pays creditors to the extent possible, files the appropriate dissolution paperwork with the secretary of state, and ceases to exist. When debts exceed assets, the dissolution does not eliminate personal liability on guaranteed obligations. But it removes the ongoing operational costs that compound losses with each passing month.
In the spring of a business that has been declining for two years, dissolution sometimes represents clarity rather than defeat.
Forbearance Agreement
A forbearance agreement asks the creditor to do nothing. Specifically, it asks the creditor to refrain from exercising its contractual remedies for a defined period, typically sixty to ninety days, while the debtor implements a remediation plan or arranges alternative financing. The agreement is bilateral. The creditor agrees to forbear, and the debtor agrees to enhanced reporting, operational milestones, or additional collateral.
The forbearance is a pause, not a solution. It purchases time. What the business does with that time determines whether the forbearance leads to recovery or merely delays the inevitable. We have represented businesses that used a ninety day forbearance to secure SBA refinancing that eliminated the original creditor entirely. We have also seen forbearance agreements expire without progress, leaving the business in a weaker position than before.
Informal Creditor Committee
When a business has multiple creditors of comparable size and no single creditor holds dominant leverage, the formation of an informal creditor committee can facilitate a collective resolution. The committee, organized by the debtor or its counsel, brings creditors into a single forum where information flows symmetrically and negotiations proceed against a shared factual baseline. The committee has no statutory authority. Its power derives entirely from the willingness of its members to participate and the credibility of the debtor’s financial disclosures.
This option works best when the creditors share an interest in the business’s survival, which is to say, when the going concern value exceeds the liquidation value by a margin sufficient to motivate cooperation. When it does not, the committee dissolves and the creditors pursue individual remedies.
Each of these paths carries requirements, risks, and timing constraints that vary with the specifics of the business’s debt structure, asset base, and creditor composition. The selection among them is not a matter of preference. It is a matter of fit. A first call establishes which options remain available and which have already closed, and that information alone can redirect a trajectory that felt inevitable.
