Assignment for Benefit of Creditors

A debtor is still liable to pay his or her creditors if the proceeds from the sale of personal and real property pursuant to an assignment for the benefit of creditors are not sufficient to completely repay the debts. When, however, creditors agree to accept the proceeds in satisfaction of the debtor's obligations, such an agreement is called a COMPOSITION WITH CREDITORS. For this reason, assignments for the benefit of creditors are used by corporate, rather than individual, debtors.

Since preferences are permissible under common law, a common-law assignment for the benefit of creditors that provides for preferential payments to designated creditors is not a fraudulent conveyance. Most courts have held that debtors cannot use preferences to obtain discharges from creditors by conditioning preferences on their release from unpaid portions of their debts. To do so is considered a fraudulent conveyance, since a creditor would have to accept virtually any condition that the debtor decided upon if the creditor were to receive any money from the assignee.