Chapter 7 Bankruptcy for Partnerships

If your business is a partnership and is struggling to pay creditors and can no longer operate, a Chapter 7 bankruptcy for partnerships may be a good bankruptcy option to shut down and liquidate the business to pay back debt.

When two or more individuals agree to jointly own and operate a business, it is called a partnership. This is a non-incorporated business entity.

Each partner’s personal liability for the partnership’s debt is dependent on the type of partnership.  The partnership is a separate legal entity and is responsible for the debt that it incurs.  Each partner may be personally  liable for the business debt depending on the structure and type of partnership.  Here are some types of partnerships:

General Partnership

A general partnership is formed when two or more individuals agree to jointly start a business and do not set up a specific type of partnership or entity.  The partners are called general partners and are all liable for the business entity’s debts.  Creditors can go after the partners’ personal assets if the business cannot pay its debts.

Limited Partnerships

A limited partnership has one general partner and multi limited partners.  This partnership is formed by filing the necessary forms and documents with the secretary of state.  The limited partners are not personally liable for debt incurred by the partnership.  However, the general partner is fully responsible for the business debt.

Limited Liability Partnerships 

A limited liability partnership is also formed by filing the necessary forms and documents with the secretary of state.  In certain states there must be one general partner in the limited liability partnership who is liable for the business debt and in other states there are no partners that are liable for the business debt.  

Partnerships can file a business Chapter 7 bankruptcy.  There are no discharges of debt and no exemptions, unlike a personal Chapter 7 bankruptcy.  The partnership’s assets are sold and the proceeds distributed to the creditors.  If a partner was personally liable for the partnership’s debt and the sale of assets did not cover all the debt, the creditors may go after the partner’s personal assets.  The partner can discharge his or her own liability by filing a personal  bankruptcy.

Advantages of filing a Chapter 7 bankruptcy for partnerships 

The bankruptcy trustee will liquidate assets and use the proceeds to pay creditors.  This is orderly and the partners do not have to worry about dealing with creditors since a partnership usually has multiple assets and creditors.  

Disadvantages of filing a Chapter 7 bankruptcy for partnerships

When a Chapter 7 bankruptcy is filed the business is shut down.  Usually the assets  are sold by the bankruptcy trustee at a lower price than when the partnership acquired them.  It may be advisable for the partnership to sell assets themselves.  Bankruptcy law gives the bankruptcy trustee the power to sue the general partners if the sale of the assets cannot cover the full debt in order to cover the difference.  

If your business is structured a s a partnership and if you are considering filing bankruptcy, speak to our experienced business debt relief lawyers today.