Bankruptcy for Business: Will My Partnership Be Affected?

If you are in the financial position of having to file for personal bankruptcy protection, but you own a business registered as a partnership, you’re probably wondering what will happen to your business after you file. Does personal bankruptcy equate to small business bankruptcy?

When you own a partnership, your personal and business finances are indistinguishable. Each partner’s personal finances assets and debts are tied to the business’s finances, and vice versa – each partner is responsible for the entire amount of the business’s debts.

Your personal and business debts cannot be separated when you file bankruptcy. Also, your personal assets and business assets will both be listed in your bankruptcy schedules.

If you’re filing Chapter 7 bankruptcy, most of your personal assets will be exempt – meaning that even though you are clearing your debt, you’ll still get to keep these items. However, most business assets are not exempt. They will become the property of the estate, and will be liquidated to pay your creditors.
Unless your partners can replace these assets, this typically means the end of your business.

If you want to save your business, though, you have a couple of options. First, instead of filing for Chapter 7 bankruptcy protection, you can file Chapter 13. Although it doesn’t erase your debts like a Chapter 7 discharge would, it does allow you to repay your debts over a period of time – usually 3 to 5 years – while continuing to operate your business.

The other option is to incorporate the business before you file for Chapter 7 bankruptcy. The estate will still become the owner of your share of the business when you file, but you will have the option of buying back your ownership at fair market value. This value will usually be less than the amount of debt you owe, so it can be a more cost effective way of obtaining debt relief while still operating your business.

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