If you own a business that is registered as a partnership and find yourself in the position of having to file for personal bankruptcy protection, what happens to your business? Does personal bankruptcy have to also mean small business bankruptcy?
Owning a partnership means that your personal and business finances are the same. It also means the same for your partners. Each partner is responsible for all the debts of the business.
Since your personal debts and business debts are the same, they cannot be separated when you file for bankruptcy. This means that your personal assets and the assets of your business will be included in your bankruptcy papers.
Many of your personal assets will be considered exempt under a Chapter 7 bankruptcy, which means that you will be able to keep these assets even though you are paying off your debt. Unfortunately, this is often not the case when it comes to trading assets. Most of these assets will become the property of the estate and will be liquidated to pay your creditors for your debt.
Unless your partners can replace these assets, this usually means your partnership will have to close.
However, there are a couple of options that can save your business. First, you can file for Chapter 13 bankruptcy protection instead of Chapter 7. This gives you the ability to pay off your debts over a period of time, usually 3-5 years. Although Chapter 13 does not erase your debts, it will allow you to keep your business assets so that you and your partners can continue to operate the business.
The other option is to incorporate the business. This will help separate your personal and business responsibility. Although the estate will become the owner of his share of the business when he files for bankruptcy, he has the option to buy back his shares at fair market value. Often the fair market value will be less than the amount of debt you owe, so it can be a less expensive way to get debt relief while still keeping your business.