What is bankruptcy?
For partnerships, declaring bankruptcy means each partner declares personal bankruptcy for themselves. The partnership’s debt will be written off, but the individual partners could be liable for them.
Partnerships are recognized arrangements between two or more parties to manage and operate a business. Theoretically, a partnership is not an independent legal object; it simply describes the alliance of the cohorts.
When the partnership does well, the partners divide the profits. In liquidation, they may well share in the commitment to fulfill debts. It all centers on the arrangement of the joint venture.
The joint venture that files for Chapter 7 insolvency, regardless of the type, is in for a wild drive, resulting in the loss of funds, lawsuits outside bankruptcy court, and the likely collapse of the partnership itself.
Are you considering trying the Chapter 13 reorganization path? Good luck getting suppliers to agree on an extended, drawn-out harf settlement plan if some grouping of the partners has sufficient personal assets to pay off all the partnership’s debts. An alert supplier may attempt to move the case into Chapter 7 to recover all it’s owed rather than some reduced portion.
That’s why most partnership agreements contain a poison pill clause: The moment one partner files for bankruptcy, the business dies, preventing trustees or creditors from suing other partners to recover debts.
Let’s assume a particular partnership lacked an instantaneous dissolution provision. Sorting whether there are sufficient assets in the partnership to meet the outstanding debt or if there will be a deficiency can consume a lot of time. Meanwhile, the court may restrict the general partners’ ability to transfer personal assets, require them to post a bond or make some other assurance they are suitable for the deficiency.
General Partnership (GP)
General partnerships are partnerships in their simplest form. When a GP files for Chapter 7 liquidation bankruptcy, the partners are personally responsible for all the partnership’s debts.
Limited Partnerships (LP)
A limited enterprise has both general partners and limited partners. Again, general partners are personally responsible to creditors. Limited partners are liable only for the debt, if any, they guarantee.
Limited Liability Partnerships (LLP)
If you’re part of a limited liability partnership—not all states provide for them in their statutes—your liability for the partnership debt may be limited, as the name suggests. However, limited liability partners remain liable for any debts personally guaranteed.
Filing Bankruptcy as a Limited Liability Company (LLC)
Functioning as a limited liability company divides the business entity and those involved in its functions. An LLC that files for Chapter 7 liquidation will end in the business’ assets being discharged to undertake its debts.
Generally, the LLC’s owners are not personally responsible for business debts unless, as with limited partners, they have personally guaranteed any of those debts. In that event, the owners may file personal bankruptcy to avoid liability.
LLCs that have hit a rough patch and foresee a viable way forward can also file for reorganization under Chapter 11 bankruptcy. Once affordable only for large corporations, the Small Business Reorganization Act, which became effective in February, simplifies and streamlines Chapter 11 for small businesses. Check with an attorney for details.
Filing Bankruptcy as a Partnership
What is bankruptcy?
For partnerships, declaring bankruptcy means each partner declares personal bankruptcy for themselves. The partnership’s debt will be written off, but the individual partners could be liable for them.
Partnerships are recognized arrangements between two or more parties to manage and operate a business. Theoretically, a partnership is not an independent legal object; it simply describes the alliance of the cohorts.
When the partnership does well, the partners divide the profits. In liquidation, they may well share in the commitment to fulfill debts. It all centers on the arrangement of the joint venture.
The joint venture that files for Chapter 7 insolvency, regardless of the type, is in for a wild drive, resulting in the loss of funds, lawsuits outside bankruptcy court, and the likely collapse of the partnership itself.
Are you considering trying the Chapter 13 reorganization path? Good luck getting suppliers to agree on an extended, drawn-out harf settlement plan if some grouping of the partners has sufficient personal assets to pay off all the partnership’s debts. An alert supplier may attempt to move the case into Chapter 7 to recover all it’s owed rather than some reduced portion.
That’s why most partnership agreements contain a poison pill clause: The moment one partner files for bankruptcy, the business dies, preventing trustees or creditors from suing other partners to recover debts.
Let’s assume a particular partnership lacked an instantaneous dissolution provision. Sorting whether there are sufficient assets in the partnership to meet the outstanding debt or if there will be a deficiency can consume a lot of time. Meanwhile, the court may restrict the general partners’ ability to transfer personal assets, require them to post a bond or make some other assurance they are suitable for the deficiency.
General Partnership (GP)
General partnerships are partnerships in their simplest form. When a GP files for Chapter 7 liquidation bankruptcy, the partners are personally responsible for all the partnership’s debts.
Limited Partnerships (LP)
A limited enterprise has both general partners and limited partners. Again, general partners are personally responsible to creditors. Limited partners are liable only for the debt, if any, they guarantee.
Limited Liability Partnerships (LLP)
If you’re part of a limited liability partnership—not all states provide for them in their statutes—your liability for the partnership debt may be limited, as the name suggests. However, limited liability partners remain liable for any debts personally guaranteed.
Filing Bankruptcy as a Limited Liability Company (LLC)
Functioning as a limited liability company divides the business entity and those involved in its functions. An LLC that files for Chapter 7 liquidation will end in the business’ assets being discharged to undertake its debts.
Generally, the LLC’s owners are not personally responsible for business debts unless, as with limited partners, they have personally guaranteed any of those debts. In that event, the owners may file personal bankruptcy to avoid liability.
LLCs that have hit a rough patch and foresee a viable way forward can also file for reorganization under Chapter 11 bankruptcy. Once affordable only for large corporations, the Small Business Reorganization Act, which became effective in February, simplifies and streamlines Chapter 11 for small businesses. Check with an attorney for details.