Why would a secured lender choose an assignment for benefit of creditors over foreclosure or bankruptcy?

This piece takes a look at a relatively new state law still working its way through various legislatures. For reasons explained later, banks might find they like it. The law in question is the Uniform Assignment for Benefit of Creditors Act (“UABCA”). The Uniform Law Commission (the “ULC”) promulgated the UABCA in 2025. Several states have adopted it already. Where enacted, the UABCA supplants other ABC statutes and, in some states, the common law. Here we: introduce the idea of an ABC; consider why the UABCA was drafted in the first place; and explain why secured lenders might like it. If it is widely adopted, the act could also give more options to secured lenders faced with companies heading toward insolvency.

An assignment for the benefit of creditors (“ABC”) is a state-law option for a distressed business, or assignor, to transfer some or all of its assets to a third party assignee who acts as a fiduciary for creditors. The assignee liquidates the assignor’s assets and then distributes the proceeds on claims. ABCs are an alternative to dissolution, Chapter 7 or 11 bankruptcy, and state or federal receiverships.

ABCs are fully voluntary for the assignor and the creditors. Unlike Chapter 11 bankruptcy, there is no automatic stay: creditors can still seek to push the company into involuntary bankruptcy or ask a court to appoint a receiver for it. ABCs succeed as voluntary workouts only when the assignee is experienced and credible enough with creditors.

But if the consents line up, ABCs can be more flexible than other options. They are typically faster and cheaper than a bankruptcy or receivership.

ABC law differs a lot across the country. Some states treat ABCs as common law, with little statute and almost no court supervision. Others base it on statute and often require court supervision. It is a common workout tool in some states, but practically unused in others. The only uniform rule around the country comes from the Uniform Commercial Code, which says that the assignee in an ABC is a lien creditor under the Code’s Article 9, which deals with priority in personal property and fixture collateral.

But if an ABC takes place under broadly used uniform rules, it could be more manageable anywhere. The Uniform Law Commission saw the current divergence in state law as a chance to create one set of rules for a debt workout tool. Drafting the new ABC law was an involved project: the ULC spent three years on it, with different groups of insolvency professionals and businesspeople acting as advisors and observers throughout. The ULC was able to build on the experience of states where ABCs are already widely used. So lenders in other states might benefit from that experience if the ULC’s model is widely adopted, in full or in part.

A Lender’s Side

To see why, let’s look at this from a lender’s side. Imagine a secured lender who took and perfected a lien on a borrower’s key assets.

Say the borrower is ABC Corporation of State A. ABC Corp is in tough times. Its owners are investors. It lost several key customers in a market downturn, and then got caught in tariffs. Now, it is close to defaulting on a line of credit with its major lender. Other creditors are growing restless. The CEO is leaving. It has a possible buyer for the company’s inventory and trademarks, and the board wants to sell what it can, wind down, and give up. The board has a few different options here, given its business and relationships. Its big lender might wonder what options would be best for it.

This board has options in Chapter 11 or 7, but either seems like overkill for a company this size, and either is too slow and expensive. A state receivership may raise similar concerns, and just dissolution of the company by the owners under state law may provoke an involuntary bankruptcy, if the creditors are unlikely to get paid in full in liquidation.

Or the lender could foreclose on its collateral. In that, it would either sell what is left at public or private sale, or claim some or all of the collateral to wipe out all or part of the lender’s debt under strict foreclosure. But after this, ABC Corp still has the same unsecured creditors, assets outside the collateral, and its own dissolution to deal with.

But State A recently adopted the Uniform Assignment for Benefit of Creditors Act. So, an ABC under the Uniform Act is now a way to wind down the company.

The first reason the lender’s assent is likely is because this is voluntary. So, the company needs the lender’s cooperation to get an ABC done. For one, the lender usually has sway over who is picked as assignee. The lender may strongly suggest or recommend candidates as assignee. The lender wants confidence in the assignee’s skill. But the Act requires a disinterested assignee. The assignee or an affiliate must not hold a claim against, nor an ownership stake in, the company.

Second, the lender usually controls the purse strings. It usually subordinates its lien to expenses of the estate. In the meantime, the lender may let the assignee use the company’s cash collateral - money in the bank, for example - only under a budget it signs off on, much like DIP financing and cash collateral orders in Chapter 11 bankruptcy.

A third reason the lender likes it is avoiding exposure to liability under Article 9. If the lender forecloses under Article 9 itself, it must send the required notices to the borrower, as well as guarantors, on time, and neither collect the collateral in an improper way, nor sell it for a commercially unreasonable price. Either step could expose the lender to liability. But the act puts the sale in the assignee’s hands, out of the lender’s, sparing it that exposure. Strict foreclosure does not help the lender as much: it still leaves the lender holding title to the collateral and having to sell it to whomever will buy it.

Concrete Features of the Act

The other reasons come down to the concrete features of the act that do not appear in most states’ current ABC law.

The first feature of the act that should interest the lender is one for corporate groups. Let’s say ABC Corp has a subsidiary organized in State B, which is not eligible for an ABC in State A on its own. Under the act, it can start its own ABC in State A next to its parent’s. And if State B has enacted the act as well, State B must recognize that ABC under the Act.

There are limits on what is assignable under ABCs. Executory contracts, and licenses or permits that cannot be assigned without the consent of counterparties or licensing authorities, are examples. If the company cannot transfer the assets under the non-assignable clauses, the lender cannot foreclose on them either. Yet they may still be part of its collateral. It is possible that ABC Corp has the same collateral problems. But if it does, the Act makes its management cooperate with the assignee and get the consent of counterparties and the licensors, or licensing authorities.

Running the business and selling it on, as is, may be the best way to preserve the collateral’s value. The act expressly lets the assignee operate the business while assets are being sold. So, the business can be sold as a going concern instead of piece by piece.

The assignee owes a fiduciary duty to the estate, so it has to use reasonable care to get the best possible recoveries. And the assignee owes this fiduciary duty to the secured creditors, like the lender, and to unsecured creditors alike. This may be a higher duty of care than the commercial reasonableness the lender would have to meet if it foreclosed and sold the collateral itself under Article 9.

Another bit of the act that favors secured lenders is a simpler claims process. The Act lets the assignee allow secured claims early, with no proof of claim.

Another feature of the act for lenders is that in it, the assignee has only limited power to claw back transfers of estate property that took place before the ABC. The assignee can undo the kinds of transfers that creditors could undo themselves under the Uniform Voidable Transfer Act or the Uniform Fraudulent Transfer Act. But it cannot recover preference payments made to non-insiders under the Uniform Act unless there is other state law to undo such a payment. So if the lender, not an insider, took payments or extra collateral shortly before the ABC, the assignee generally cannot claw those back as preferences, unless another law of that state gives it that power. If ABC Corp has financial contracts like securities, swap, repo, commodity, forward, or master netting contracts, the act keeps the safe harbors for those contracts that the Bankruptcy Code does.

The act does not require court permission or oversight, and that is all meant to hold down costs. But the assignee or any interested party can go to a state court for help if needed, like asking for the court to approve an asset sale or to settle a disputed claim.

If ABC Corp’s assets are in more than one state, things can be simpler with the act. If an ABC takes place in one state, and there are assets in another state that has also enacted the act, that state generally has to respect that ABC. A local court can name an ancillary assignee to collect those assets.

If many states enact the UABCA, the one set of rules will give lenders more certainty about the law in states where they hold collateral. More certainty will mean standard forms, which may cut deal costs and make it easier to lend everywhere.

An ABC is often not the best workout tool for a distressed company. But where an ABC makes sense, the UABCA can give the business or its creditors the most value from what is left of the company. And secured lenders have a lot to like in it.

The Act’s Text

The best place to see the Act’s text is on the Uniform Law Commission’s website at uniformlaws.org, which also lists states which have enacted it so far. The act’s official commentary also appears there. For a full explanation of the act and why it was written, read Laura Coordes and Edwin E. Smith’s article, published in the Summer 2026 edition of The Business Lawyer.

The Bankruptcy Code is located at 11 U.S.C. § 101 et seq.

See Coordes and Smith, above.

For a basic practical handbook on ABCs, read Geoffrey L. Berman and Robert M. Saunders’s handbook, published by the American Bankruptcy Institute, 6th edition, 2025.

See UCC § 9-102(a)(52), definition of “lien creditor.”

The Uniform Law Commission can provide a list of the people who took part in drafting the act.

Usually, court appointed receiverships are started by a creditor, not voluntarily by the debtor.

See UABCA § 4(a).

See UABCA § 14.

The Uniform Commercial Code provision is UCC § 9-625.

Uniform Assignment for Benefit of Creditors Act § 3.

See UABCA § 2(2), definition of “asset”.

UCC § 9-408.

Section 8(b)(8) of the Uniform Assignment for the Benefit of Creditors Act.

UABCA § 10(b)(1).

The provision is in UABCA § 9(a).

See UCC § 9-627(a).

See UABCA § 11(b)(1).

As appears at § 10(b)(12) of the Uniform Assignment for the Benefit of Creditors Act.

UABCA § 10(e).

UABCA § 21; whether a court order approving a sale can cut off successor liability claims is left to other law.