Can a Partnership Seek Bankruptcy While Its Partners Don’t?
Like any business entity, a partnership may seek bankruptcy protection when it is unable to pay its debts and risks insolvency. However, unlike a corporation, a partnership does not shield its equity owners from liability to creditors. So there are special issues that arise when the entity itself files for relief but the partners themselves are not necessarily filing for personal bankruptcy.
In a partnership, partners may be personally liable for the organization’s debts, depending on the partnership structure (general partnership vs. limited partnership). In a general partnership, all partners share personal liability for business debts, meaning creditors can pursue the partners’ personal assets to settle the partnership’s debts. Conversely, in a limited partnership, only the general partners hold personal liability, while limited partners typically risk only their invested capital.
Partners’ personal assets may be at risk in several scenarios during a partnership bankruptcy. If the partnership is liquidated, the bankruptcy trustee will sell the partnership’s non-exempt assets to repay creditors. If the partnership’s debts exceed its assets and creditors cannot be fully paid, the trustee can pursue the personal assets of the partners, especially in a general partnership. Even if the partners do not file for personal bankruptcy, they might find their personal savings, property and other assets vulnerable if creditors seek to satisfy unpaid debts.
Chapter 7 may appear to be the more straightforward route for partnerships that are unable to maintain solvency. However, this leaves the general partners liable to creditors. If there is a possibility of restructuring so that the partnership can generate revenue to service part of its debts, Chapter 11 may be considered. This chapter allows the partnership to reorganize, renegotiate its debts and continue operations, which could be a preferable outcome for partners wishing to preserve the business.
The potential outcomes of a partnership bankruptcy vary. In a Chapter 7, the partners may lose the partnership’s assets, but they could potentially negotiate settlements with creditors to mitigate personal losses. In a Chapter 11, partners might successfully restructure the business and retain their personal assets. The impact of a partnership bankruptcy on partners’ assets ultimately hinges on the partnership structure, the financial situation of the business and decisions made during the bankruptcy process.
Located in downtown Beverly Hills, the Law Offices of Michael Jay Berger provides bankruptcy representation for partnerships, corporations and individuals. To schedule a free consultation, call 310-271-6223 or contact me online today.
