Bankruptcy laws are designed to allow a business either to rehabilitate finances through reorganization or liquidate assets to avail a fresh start. Partnership firms are unincorporated business structure created by two or more individuals who agree to jointly own and carry on a business. A partnership is a separate legal entity and it is responsible for its business debts. There are different types of partnerships that influence the member partner’s personal liability for partnership business debts.
The structure of partnership can be classified in accordance with varying degrees of personal liability of its partners. In general, partnership firms are classified as general partnership, limited partnership and limited liability partnership (LLP). In a general partnership, all partners are general partners and they are personally liable for the business debts of the partnership. If the partnership fails to repay its business debts, the creditors can recover the amount from the personal assets of its partners.
Limited partnerships are registered with the State. A limited partnership requires at least one general partner with multiple limited partners. The general partner is totally responsible for the business debts of the partnership. However, there is no personal liability for limited partners in a limited partnership firm.
Limited liability partnership (LLP) firms are another form of partnership with no personal liability. Generally speaking, all partners in a limited liability partnership enjoy limited liability protection.
Partnerships can file Chapter 7 bankruptcy proceedings to dispose of business debts. However, as opposed to a personal bankruptcy, partnerships cannot generally receive a discharge. In the Chapter 7 liquidation, all business assets of the partnership are liquidated and dispersed among the creditors. Usually, the bankruptcy is closed after the settlement of all claims of creditors. Generally, if a partner was personally liable for the partnership business debts, his/her liability is not suffering from the partnership’s bankruptcy. If the partnership has insufficient assets to pay off its creditors, the creditors can claim personal assets of a partner if s/he was personally liable.
The Chapter 7 liquidation trustee is appointed to settle all debts based on its priority. The trustee liquidates all assets of the partnership business and disburses the proceeds to the creditors. Consequently, this creates the procedure a lot easier and more arranged for the partners because they do not have to fear about promoting the resources and working with creditors.
In the case of a partnership business, Chapter 7 liquidation is an end to its operation. There is no opening for a continuation or reorganization. In certain situation, the trustee disposes the assets at a lower price than the present market value. Therefore, it is preferable that if the partnership business has significant amount of assets, the partners can disburse the debts by their own involvement. Moreover, if the partnership firm has insufficient assets, the bankruptcy trustee can sue the general partners to recover the business debt balance.