If A Partner Files Bankruptcy What Happens To The Partnership?

by Douglas Jacobs, Esq.

July 8, 2008

What are the repercussions for a partnership if one of the partners has to file bankruptcy? A couple of days ago I wrote a post on filing bankruptcy if a partnership fails. But what if the partnership is still in business but one of the partners needs to file bankruptcy. What is the impact on the business?

First of all, the partner that needs to file bankruptcy can withdraw from the partnership before filing. That will eliminate all complications between his personal assets and obligations and the partnership property or debts.

But what if he doesnít want to leave the partnership and the business is doing okay? His assets in the bankruptcy will include a percentage of the partnership depending on the interest he held. Fortunately, the trustee in bankruptcy canít really liquidate such ownership to pay creditors. The portion that is in the bankruptcy estate is only that: a portion; and therefore the other partners can vote not to liquidate or distribute the assets. Further, there is rarely any market for a partnerís interest so unlike stock in a public corporation; it canít be sold to raise money for the bankruptcy estate.

The bankrupt partner must list all of the partnership debts along with any personal debts he owes because as a partner he is personally liable for all of the business debts. Thus, as to the bankrupt partner, the debts will be discharged (in a chapter 7), or partially paid (in a chapter 13 or 11). The other partners, however, will remain personally liable for the debts.

The greatest impact then to the partnership might be the credit it can get from its vendors. Once one partner goes bankrupt, the creditors often get pretty concerned about the business itself and refuse to extend previous credit terms.

If you are a partner facing such a problem, you should consult a competent bankruptcy attorney.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

Last modified: October 22, 2012