Personal Bankruptcy & Business Partnerships
Many individuals enter into a business partnership in the hopes that joining forces with another person will create a better client base, bring a more various set of skills to the table, and generally help business boom. Agreeing to a partnership means sharing not only in profits and success, but also in losses and debts. What can you do when your partner declares personal bankruptcy? How does this put you at risk?
If Your Partner Files For PERSONAL BANKRUPTCY
If your business partner files for bankruptcy, you are not automatically put into bankruptcy. Your partner’s half ownership of the partnership is considered an asset of the bankruptcy “estate”. The Licensed Insolvency Trustee (LIT) will have a valuation of the partnership prepared and then use this value to determine the amount the Trustee will seek to realize.
Unfortunately, the partnership’s joint liabilities are not forgiven if only one of the partners files for personal bankruptcy. Upon your partners filing, all joint liabilities will become the sole responsibility of the non-bankrupt partner(s). Where the partnership owes a large loan, this can be extremely stressful.
Dissolving the Partnership
Partnerships are generally dissolved in the event of one partner’s bankruptcy. The reason is that selling a half ownership is not easy to do, as partnerships carry risk and are often entered into for a specific business purpose.
Seeking a Loan Modification or Debt Workout Plan
Without your former partner, the specific terms of your loan may be burdensome, but manageable with some negotiation. You may wish to approach your lender to discuss the situation, and to determine whether the term of the loan or interest rate can be modified. If you foresee continuing the business, but need some relief with respect to monthly loan repayments, it can help to find out if a new payment arrangement can be made.
In order to propose a debt workout or debt settlement option, you may find it worthwhile to speak to a licensed insolvency trustee in Toronto at Harris & Partners Inc. We can assess your situation and determine how various arrangements will impact your business and you personally, including your taxes and credit rating.
Continuing to Grow the Business Individually
However you resolve matters with your partner, you may wish to continue operating individually if the business is sufficiently profitable. Consider whether there are any effective ways of increasing the partnership’s profitability, even if you are not increasing your own personal profits. For example, consider whether hiring an employee to help address new business would be beneficial.
Should you have any questions or concerns regarding one of your partners declaring bankruptcy, please feel free to contact one of our Licensed Insolvency Trustees. Every bankruptcy situation is unique. Call us at 1-800-268-8093 to reach us in Toronto, North York, Markham, Barrie, Brantford, Hamilton, Oshawa, Pickering, St. Catharines, or Brampton.