What To Do When You Want To File Bankruptcy But Your Business Partner Doesn’t?
Business partnerships are great when business is booming but once you hit a severe downturn or realize that the business isn’t earning enough money, you may need to consider Chapter 7 bankruptcy. But what happens when you realize that you need to file a necessary business bankruptcy but your partner doesn’t agree? Here’s what you need to know if your partner doesn’t want to file for bankruptcy.
You Can Still File Bankruptcy
If you’re a general partner, you can file bankruptcy on behalf of the business which will immediately dissolve the partnership in the case of a Chapter 7 bankruptcy. This is what will happen if you file a business bankruptcy as a general partner:
- An automatic stay
The moment you file Chapter 7 bankruptcy for your business, creditors can no longer pursue your business for payment. But this also means that your partner (and you) will need to cease doing business. Your business partner is required to obey the automatic stay and respect the bankruptcy proceeding. They are allowed to move any assets including cash out of the business even to pay creditors.
- Getting permission
If your business partner wishes to continue to do business while the bankruptcy is ongoing, they will need to get permission from the bankruptcy court. The business partner is not allowed to do any business without the permission of the bankruptcy court.
- Asset return
If you or your business partner recently made debt payments, that money may need to be returned to the bankruptcy court. This rule is in place to prevent debtors from preferring some creditors over others by paying off some debts BEFORE they file bankruptcy. It also helps prevent debtors from transferring assets to “safe havens” such as a relative’s bank account for use at a later date.
Getting Bought Out
If your partner doesn’t want to file for bankruptcy because they want to remain in business, they can opt to buy out your partnership interest. For small businesses, this can usually be done very cheaply. But what this means is that if you made large cash or asset investments into the business as part of your partnership agreement, it isn’t likely that you will get that money. It may be wise to discuss a buyout of your partnership interest before you file bankruptcy.
Most creditors require a personal guarantee on loans and credit lines given to small businesses. This means that even if you file a business bankruptcy, you and/or your partner may still be personally liable for the debt that was incurred while in business. It’s best to discuss what will happen to this debt with your business partner before you file Chapter 7 bankruptcy. This is especially true if your partner plans to buy out your business interest.
Engage An Attorney
If you’re filing a business bankruptcy and your business partner is resistant or your partner doesn’t want to file for bankruptcy, it’s best to engage a bankruptcy attorney early in the process. An experienced bankruptcy lawyer can help you understand what your options are and what pitfalls await you as you exit the business. Also, a bankruptcy attorney can advise you on how to dissolve your partnership in a way that does the least harm to your personal finances and the finances of your business partner.