Partnership Bankruptcy: Why Individual Partners Can be Sued by a Trustee

Partners in a business resort to partnership bankruptcy after trying out various debt consolidation or settlement procedures. Partners planning for filing bankruptcy should initiate Chapter 11 partnership bankruptcy as it allows the reorganization of the business assets and operations, yet the control of the business can be in the hands of the debtor. Though filing for bankruptcy generally gives freedom from excessive debts and tensions associated with it, it damages the credit history of the debtors. Hence bankruptcy should be chosen as a last resort to save the business.

Trustee’s Role

In chapter 11 bankruptcies, a debtor can operate and control the business operations if a separate trustee is not appointed. As a controller of the business operations, the debtor can avail of new finance or loans on priority basis. As per the rules of the bankruptcy code, debtors receive protection from being sued for legal cases related to debt settlement. An automatic stay comes into force and gives freedom from the embarrassing phone calls or other measures of collection of the debts by the creditors.

Status of Individual Partners

Partners are not provided with a shelter of limited liability unless and until the business was incorporated as a limited liability corporation. In such limited liability partnerships the partners are held liable for only some part of the debts. On the contrary, in ordinary partnership businesses, when the bankruptcy button is pressed, all the partners are held responsible for the settlement of the debts.

If the partners have filed for bankruptcy individually, then they might be advised by the trustee to file for a joint Chapter 11 bankruptcy on being sued by the creditors. However, if any of the partners had filed a Chapter 13 bankruptcy, then only the bankruptcy trustee can direct these partners to convert the bankruptcy case from Chapter 13 to Chapter 11 partnership bankruptcy. Partners who are in control of the business operations may be sued by the trustee if they make any important decision or decisions regarding the business without the permission of the bankruptcy judge in advance. However, the trustee cannot sue any of the other partners for any other reasons as per the provisions of the bankruptcy code.

Acquiring Legal Assistance

When you are forced into a situation where bankruptcy seems to be the only solution, it is time to obtain professional advice and assistance. You can approach any of the bankruptcy attorneys who will analyze your case and offer legally acceptable solutions. This is the prudent course to take; a lawyer can be a formidable ally.