Bankruptcy partners

3 key takeaways

• Partnership bankruptcy involves the joint handling of the partnership’s debts and liabilities.
• Partners may be personally liable for partnership debts, depending on the type of partnership.
• The bankruptcy process can differ based on whether the partnership is a general partnership or a limited liability partnership.

What are bankruptcy partners?

Bankruptcy partners are the individuals or entities involved in a business partnership that is undergoing bankruptcy proceedings. Partnerships are business structures where two or more individuals share ownership and responsibility for the business. When a partnership faces financial difficulties and cannot meet its debt obligations, it may file for bankruptcy.

The type of partnership determines the extent of personal liability each partner may face. In a general partnership, all partners typically share liability for the partnership’s debts. In a limited liability partnership (LLP), partners have limited personal liability, protecting their personal assets from being used to pay partnership debts.

Types of partnerships in bankruptcy

1. General Partnership

• Liability: All partners are personally liable for the partnership’s debts and obligations.
• Bankruptcy impact: Each partner’s personal assets can be pursued by creditors if the partnership’s assets are insufficient to cover the debts.

2. Limited Liability Partnership (LLP)

• Liability: Partners have limited personal liability, meaning their personal assets are generally protected from being used to pay partnership debts.
• Bankruptcy impact: Only the partnership’s assets are used to settle debts, and partners’ personal assets are usually not at risk.

3. Limited Partnership (LP)

• Liability: Includes both general partners (with unlimited liability) and limited partners (with liability limited to their investment in the partnership).
• Bankruptcy impact: General partners can be personally liable for debts, while limited partners typically only risk losing their investment.

How does the bankruptcy process work for partnerships?

1. Filing for bankruptcy: The partnership files for bankruptcy, listing all its assets, liabilities, and information about each partner.
2. Trustee appointment: A bankruptcy trustee is appointed to oversee the case, manage the partnership’s assets, and distribute proceeds to creditors.
3. Asset liquidation or reorganization: Depending on the type of bankruptcy (Chapter 7 or Chapter 11), the partnership’s assets may be liquidated to pay creditors, or a reorganization plan may be developed to allow the partnership to continue operating while repaying debts.
4. Personal liability: In a general partnership, if the partnership’s assets are insufficient to cover its debts, creditors can pursue the personal assets of the partners. In an LLP, creditors can typically only pursue the partnership’s assets.

Responsibilities of bankruptcy partners

• Full disclosure: Partners must fully disclose all partnership assets, liabilities, and financial information.
• Cooperation: Partners must cooperate with the bankruptcy trustee and court throughout the process.
• Managing personal liabilities: General partners need to be prepared for the possibility of their personal assets being used to settle partnership debts.

Real-world application

Example: Sarah and Mike own a small construction business as a general partnership. Due to several failed projects and mounting debts, they decide to file for Chapter 7 bankruptcy.

Filing and process: They file for bankruptcy, listing all partnership assets and debts. The bankruptcy trustee is appointed and begins liquidating the partnership’s assets to pay creditors.

Personal liability: The partnership’s assets are insufficient to cover all the debts, so creditors pursue Sarah and Mike’s personal assets, including their savings and properties, to settle the remaining debts.

Outcome: Sarah and Mike face significant personal financial consequences due to the unlimited liability in their general partnership, highlighting the importance of understanding partnership liabilities in bankruptcy.