For the average small business owner in 2026, a debt settlement and an ABC (assignment for the benefit of creditors) are not an “either or” but different things. A debt settlement is a deal with your creditors, typically to keep the going concern operating in a more sustainable way or to purchase releases for the owners. An ABC is a state statutory proceeding to liquidate the business and the independent assignee controls the business’ assets, liquidates them and pays off the creditors. Neither a debt settlement nor ABC would discharge the company’s debts like a personal bankruptcy discharge. Typically the number one question for most small business owners is, how much do they owe personally, i.e., the debts they personally guaranteed. The typical answer, then, is to do an ABC for the company and a negotiated release of the owners’ guarantees.
ABC Process
An ABC begins when the company signs a contract transferring essentially all of its assets in trust to an assignee the company chooses. More than 30 states allow ABCs, and the rules differ. California runs ABCs largely without a court filing. Under California Code of Civil Procedure sections 493.010 through 493.060 and 1800 through 1802, the assignee notifies creditors within 30 days and sets a claims deadline 150 to 180 days after that notice. The whole process typically runs about a year. Most corporations need both board and shareholder approval, and the company cannot take the assignment back once it is signed.
ABCs in Florida are closer to a court proceeding. Under Chapter 727 of Florida’s statutes, within 10 days of receiving the assignment, the assignee has to file a petition in circuit court. The assignee must post a bond in the greater of $25,000 or twice the liquidation value of the unencumbered and liquid assets. Creditors generally have 120 days from the filing of the petition to file their claims. Employee wage claims earned within 180 days have a priority of up to $10,000 each; customer deposits have a priority of up to $2,225 each. A landlord’s damages for a rejected lease are limited to the greater of one year’s rent or 15% of the unexpired term of the lease.
An ABC has limitations that marketing materials often fail to disclose. There is no automatic stay. Creditors may continue to sue the company and secured creditors may still enforce their liens. Neither the California nor the Florida ABC process discharges the remaining debt owed by the company. A filing would not discharge the company’s debt under Chapter 7: 11 U.S.C. 727(a)(1) specifically excludes granting a discharge to anything but an individual. An LLC or corporation chooses an ABC over a Chapter 7 filing for control, speed, privacy, and cost, not for a fresh start. Creditors who object to an ABC can force the company into an involuntary bankruptcy. As of April 1, 2025, it requires undisputed claims of $21,050 and three creditors if the company has 12 or more creditors.
The cost can make an ABC impossible. Assignees typically receive a percentage of the assets they sell, so if a company doesn’t have much equipment, inventory, or receivables, no assignee may want to take the job. Administrative costs and the assignee’s fee are taken out of the proceeds before unsecured creditors receive anything. A business whose only assets are pledged to one lender, say a merchant cash advance funding company with a blanket lien on every asset, may have next to nothing for an assignee to liquidate. The more realistic choice for this type of business may be a settlement with a few of the creditors, or a straight Chapter 7.
Pre-ABC payments–These may be clawed back. In California, it depends. California Code of Civil Procedure section 1800 gives an assignee the right to recover certain preferential payments made to creditors. However, in Sherwood Partners v. Lycos (2005), the Ninth Circuit Court of Appeals ruled the federal Bankruptcy Code preempted that right and threw out an assignee’s action to recover a $1 million payment. In Haberbush (2006), a California Court of Appeal took a different view, and in 2015 a federal court in Northern California ruled Sherwood controls in federal court. A business owner who has paid off guaranteed debt or insiders before an ABC shouldn’t be surprised if that payment gets investigated.
A Good Settlement
Each creditor needs to agree to accept less. One cannot force a holdout to settle. Merchant cash advance funders typically have UCC liens, take a daily or weekly debit from a business bank account, and require a personal guarantee. Owners of companies cannot go out of business to avoid an owner’s personal guarantee. A good settlement has a signed document, stating the amount of money and the terms of payment, release of the owner as guarantor and the company. Payment to a creditor without a written release is just another payment under the original contract.
The tax impact of a settlement is different from an ABC. All “forgiven” debt by a creditor in a settlement will typically be considered income to the debtor unless an exclusion applies. The $600 has nothing to do with the tax treatment. It is merely a threshold requirement so that if the forgiven amount is $600 or more, the creditor is required to file a form 1099-C with the IRS. It is not a tax free amount. The insolvency exclusion that is filed on the form 982 will only cover the forgiven debt to the extent of the insolvency. That is the amount that the fair market value of your assets immediately before the cancellation of debt was less than the amount of your liabilities. If the single member LLC is insolvent but the owner is not then the owner cannot use the insolvency of the LLC to exclude the income.
There is less federal legal protection from abuses by settlement companies in the area of business debts. Since October 27, 2010, the Federal Trade Commission’s Telemarketing Sales Rule requires phone-selling debt relief companies to not charge any fee until they have successfully settled at least one debt and the customer has paid at least one payment under the settlement. But, calls to a business have long been exempt. An April 16, 2024 amendment to the Telemarketing Sales Rule extended the Rule’s ban on misrepresentation to business phone calls but not the Rule’s other requirements. Thus, charging an upfront fee to settle a business’ debt is often legal. Business owners who enroll in a debt relief program should be careful to understand all of the terms of any contract or agreement, including the fee terms.
Does the FTC investigate fraudulent businesses that make false promises to small businesses? Yes. In September 2025, the federal court entered summary judgment against Seek Capital. In November 2025, the court issued a final order that enjoined the company and the CEO from working in the business financing, debt relief or credit repair industries, and imposed a judgment in the amount of $48,280,328. The FTC claimed that small business owners lost over $37 million after being charged fees to open credit cards they were told would be used to finance their business. The case highlights the risk of misrepresentation when small business owners buy into financial services intended to help manage their failing business.
Payroll Taxes
Payroll taxes don’t go away. Section 6672 of the Internal Revenue Code allows the IRS to assess the Trust Fund Recovery Penalty personally against those who were responsible for withholding and paying over employee income tax and payroll taxes and willfully failed to do so. The penalty is 100% of the unpaid trust fund amount. It can be imposed even after the business has closed or dissolved or filed for bankruptcy, and it doesn’t respect the separate existence of the LLC or corporation. A business owner weighing an ABC or debt settlement option should treat withheld payroll taxes as a personal obligation to settle first.
The Right Answer
The right answer depends upon the facts. A business with existing cash flow, a few concentrated creditors like a merchant cash advance funder, and modest guarantees is a candidate for a settlement. A business that is no longer running, with meaningful unencumbered assets and numerous unsecured creditors, and in a state with a good ABC law on the books is a candidate for an ABC. A business with a lot of litigation, or facing aggressive collections is a candidate for a bankruptcy, because only in bankruptcy is there an automatic stay of collections. A business with large personal guarantees that cannot be settled is a candidate for the owner’s Chapter 7, because only an individual can get the benefit of discharge that an ABC, or corporate bankruptcy filing cannot provide.
