Alternatives to Chapter 11 for Small Businesses: Out‑of‑Court Workouts, Assignments for Benefit of Creditors, and More

Introduction — When Chapter 11 Isn’t Your Only Path

Small businesses facing insolvency or severe cash‑flow strain have options beyond a full, traditional Chapter 11 case. This article summarizes realistic alternatives — negotiated out‑of‑court workouts, California assignments for the benefit of creditors (ABCs), and the streamlined Subchapter V Chapter 11 process — and explains when each path can preserve value, reduce cost, and speed resolution for business owners in Los Angeles.

Because federal dollar thresholds that affect Subchapter V have changed recently, eligibility and costs can shift quickly; the Subchapter V eligibility threshold reverted in mid‑2024 and was scheduled for a triennial adjustment effective April 1, 2025. Read on for practical comparisons and next steps.

Out‑of‑Court Workouts: Fast, Flexible, Private

What they are: An out‑of‑court workout is a negotiated restructuring between the business and one or more creditors (lenders, landlords, major vendors) that modifies loan terms, pauses enforcement, or settles claims without filing bankruptcy. Common tools include forbearance agreements, loan modifications, extensions, partial debt settlements (composition), and consensual sales.

When workouts make sense

• The business is viable long term but needs temporary relief (cash‑flow shortage, seasonal downturn, or short‑term disruption).
• Creditors prefer recovery with minimal delay and expense rather than the risk and cost of bankruptcy.
• There are one or a small number of controlling creditors whose agreement unlocks a practical solution.

Pros

• Speed and confidentiality — no public court docket.
• Lower professional fees and transaction costs than bankruptcy.
• Flexibility to craft pragmatic commercial terms (interest-only periods, balloon payments, equity infusions, partial principal reductions).

Cons & risks

• Requires creditor cooperation; holdouts can derail a plan.
• Agreements are contract‑based and may be reversible if parties later identify problems.
• No automatic stay — unsecured creditors or secured lenders may still pursue remedies unless they agree otherwise.

Practical steps for a workout

1. Get current, accurate financial statements and a short recovery plan or cash‑flow projection.
2. Identify the priority creditors and decision makers (lead bank officer, main vendor, landlord).
3. Approach creditors early with a focused proposal (forbearance term, payment schedule, valuation or sale plan).
4. Document any agreement carefully (forbearance, loan modification, intercreditor provisions) and consider limited, short court relief if necessary to bind reluctant parties.

Workouts can succeed quickly, but preserve contemporaneous records and seek counsel early — good documentation increases credibility with lenders and reduces later disputes.

Assignment for the Benefit of Creditors (ABC) — California's Common‑Law Liquidation Alternative

What an ABC is: In California, an assignment for the benefit of creditors is a voluntary transfer of a company's non‑exempt assets to an independent fiduciary (the assignee) who liquidates assets and distributes proceeds to creditors. It’s a statutory/common‑law procedure often faster and less expensive than a formal bankruptcy liquidation.

Key statutory requirements and timing (California)

• At the time of assignment, the assignor must provide the assignee a sworn list of creditors and claim amounts. The assignee must give notice to creditors and set a claims bar date between 150 and 180 days after first notice. (Cal. Code Civ. Proc. § 1802).
• ABCs may be conducted with little or no court supervision in California (unlike a full bankruptcy), though court involvement may occur if disputes arise or to obtain specific relief for purchasers or creditors.

Pros

• Speed — an assignee can market and sell assets quickly, often preserving going‑concern value.
• Lower cost and less publicity than Chapter 7/11 filings.
• Clean transfers can facilitate asset sales free of some legacy liabilities when structured correctly.

Cons & risks

• Less automatic creditor protection: without the federal automatic stay, litigation risk can continue unless coordinated.
• Buyers in ABC sales usually purchase "as‑is, where‑is" with fewer reps and warranties, which may reduce sale proceeds.
• Insider sales or inadequate notice can lead to litigation alleging fraud or preferential treatment. Courts scrutinize sales that benefit insiders.

When to consider an ABC

An ABC is often attractive when a company’s assets (equipment, inventory, IP, customer lists) can be sold quickly to satisfy claims and management wishes to avoid the complexity and expense of Chapter 11 or Chapter 7. For companies in California the ABC route is well established; select an experienced assignee and counsel to maximize sale value and reduce litigation risk.

Subchapter V — A Streamlined Chapter 11 Option (and how it fits into the mix)

Overview: Subchapter V (created by the Small Business Reorganization Act of 2019) is a streamlined chapter 11 designed for "small business debtors" with simplified procedures, a Subchapter V trustee, and lower administrative burdens than traditional Chapter 11. It can let owners retain equity through consensual plans and often costs less than full Chapter 11.

Important eligibility and recent changes

Debt thresholds matter. After temporary pandemic‑era increases expired on June 21, 2024, the Subchapter V debt limit reverted to approximately $3,024,725 for cases filed on or after June 22, 2024. The Judicial Conference’s triennial inflation adjustment raised many Bankruptcy Code dollar amounts effective April 1, 2025 — including the small‑business (Subchapter V) threshold to approximately $3,424,000. Because these amounts change by statute and periodic adjustment, confirm current thresholds before filing.

How to choose among options — practical checklist

1. Assess business viability and timeline: viable business + temporary gap = workout or forbearance; non‑viable business with valuable assets = ABC or Section 363 sale; viable but capital‑constrained and within Subchapter V limits = Subchapter V option.
2. Estimate costs and speed: workouts and ABCs are usually faster and cheaper than Chapter 11; Subchapter V is often faster/less costly than traditional Chapter 11 but still involves court filings and trustee oversight.
3. Consider creditor composition: if one lender controls recovery, a workout can work; if many creditors and contested claims exist, court supervision (Subchapter V or Chapter 11) may provide a cleaner resolution.
4. Preserve leverage: avoid reckless transfers or insider sales that can be reversed or litigated.

Local practical advice for Los Angeles small businesses

• Talk to a Los Angeles restructuring attorney early — local practice, trustee expectations, and venue considerations matter. Local bankruptcy court guidance and trustee practices vary by district.
• If pursuing an ABC, retain an experienced assignee and follow California notice and bar‑date requirements (Cal. Civ. Proc. § 1802) to reduce litigation risk.
• For a workout, prepare clean financials and a short, credible recovery plan; lenders respond better to data and specific, time‑limited proposals.
• When Subchapter V is being considered, confirm the current debt threshold and timing — statutory dollar amounts were adjusted in early 2025 and may affect eligibility.

Final takeaways

There is no one‑size‑fits‑all path. Out‑of‑court workouts preserve confidentiality and can be fastest when creditors cooperate. ABCs are a robust California route to liquidate assets and often save time and expense versus formal bankruptcy. Subchapter V remains an important streamlined federal option for eligible small businesses that need the protections of the Bankruptcy Code but want a faster, lower‑cost chapter 11 process. Choose based on business viability, creditor profile, timing, and the likely recovery landscape — and get counsel early to preserve options.