There can be a number of repercussions if one partner in a business partnership files bankruptcy and the business is solvent. In this case the other partner(s) will usually not want to close the business because it is still viable, though that is an option. The eventual outcome will depend on the type of bankruptcy filed and the specific circumstances.
The Insolvent Partner and the Partnership
In a perfect world your partnership agreement will have already addressed the disposition of partnership assets in the event one partner filed a personal bankruptcy. Often such an agreement is not present and the bankruptcy court must deal with the issue.
When a Chapter 7 liquidation bankruptcy is filed by a partner, a bankruptcy trustee may force a sale of the share of partnership assets owned by the filer though this is not likely. The problem that can emerge is the difficulty faced in selling a partnership share. One option is for the solvent partner(s) to buy the assets.
Cases are not always that straightforward because the non-filing partners can vote to not liquidate assets and effectively block the bankruptcy court from distributing the bankrupting partner’s share of the assets. The personal and business shares of debts of the filer are discharged by the court and the economic interests of the insolvent partner revert to the remaining partner(s).
In a Chapter 13 bankruptcy the filer’s personal and partnership share of debts will be partially paid under a restructured payment plan. Remaining business debts are the responsibility of the solvent business partner(s).
Partnership Responsibility for Debts
In a partnership the non-filing partners remain personally liable for the bankrupt partner’s share of the business debts that are not paid through the bankruptcy. The partner filing bankruptcy will list the partnership debts along with personal debts. They will be fully or partially discharged but only in terms of the filing partner’s responsibility.
Debtors can continue to collect the amounts owed by the partnership. The solvent partners will assume responsibility for all of the partnership debts.
Be Sure to Consult an Attorney
It is important to consult an attorney who is an expert in bankruptcy law as soon as it becomes apparent a partner may have to file bankruptcy. The attorney can review the facts of the case and provide competent advice on how to protect the business and minimize potential negative financial impacts on the solvent partners.
