Can a Partnership File Bankruptcy?

06 Jul Can a Partnership File Bankruptcy?

Partnerships, like many other businesses in this economy, can fail too.  What are your options when the debts of the business exceed its assets?

Unlike a corporation, a partnership lacks the “shield” between its owners and its debts.  Legally, it is more like a sole proprietorship (but one owned by more than one person).  The individual partners or owners are individually liable for all of the debts of the partnership!  They also own all of the assets.

So, if the business is failing, usually that will mean that the individual partners will each have to file bankruptcy to get relief from the debts.  Generally this starts with the dissolution of the partnership.  Unless there is a specific agreement to the contrary, each partner owns an equal share of the assets.  These need to be sold to help pay the debts.  Any assets left over can be divided (or sold and the proceeds divided).

Unfortunately, any debts not paid after the assets are liquidated are owed by all of the partners.  That means that a creditor can proceed against any of the partners for the entire debt!  Just because you and your partner may have agreed differently, you are still both liable in the eyes of the law.  Thus, the comment above that each partner might have to file bankruptcy.

To fully understand all of your rights and obligations, please seek the help of a qualified 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.
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