When A Business Partner Files Personal Bankruptcy

Business Partners and Bankruptcy

As most business owners know, there are inherent risks and rewards in having business partners.  However, one of the major risks is that a partner will pull out of a business and neglect to fulfill his/her responsibilities for debt payment.

For business owners who have current or former partners who are considering a personal bankruptcy, there are a few things you should know:

  1. If you and your business partner guaranteed any of the company’s debt, their bankruptcy filing could trigger a clause in the debt agreement that would make the entire loan due immediately.
  2. You could end up on the hook for the entire loan amount if your former business partner’s debts are wiped out in bankruptcy.
  3. The bankruptcy court could technically become an owner in your business after the partner files bankruptcy.  For example, if your partner was a 50 percent owner in your business, then his/her share could become part of the bankruptcy estate, essentially making the bankruptcy trustee your business partner.
  4. Even if the bankruptcy estate takes hold of your partner’s share of the business you may be able to regain 100 percent of the company.  For example, if your company has a very low monetary value, the bankruptcy trustee may not be interested in pursuing ownership. However, if the business has some cash flow and assets the bankruptcy trustee may try to seize your business partner’s share.
  5. To protect your assets and your share of the business, talk to a bankruptcy attorney as soon as you suspect that your business partner may file bankruptcy.  A bankruptcy attorney will be able to work with you so that the bankruptcy filing has minimum impact on your financial position.