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What happens to your LLC or partnership if one partner files for bankruptcy?

On Behalf of | Oct 13, 2022 | Business Bankruptcy, Chapter 11, Chapter 7 |

In Florida, an LLC or partnership can be forced to dissolve or reorganize if one partner files for bankruptcy. However, the court will work with the remaining partner to ensure that the business continues to run smoothly while the bankrupt partner works their way out of debt. Many people mistakenly assume that their business will be forced to close its doors when this happens, but in most cases, this situation can be avoided. This process requires some adjustments and changes but is still a viable option to support continued operations. 

Chapter 7 versus Chapter 13

Chapter 7 bankruptcy means the company will liquidate all assets and distribute them to creditors. Chapter 13 bankruptcy entails paying back debts over three to five years with a court-approved payment plan.

Debts remain after filing for bankruptcy

In Florida, a bankruptcy filing will not discharge the debts of a partner in an LLC. The remaining partners are still liable for the discharged debt. This policy means that the business could be responsible for paying off any balances owed by the bankrupt partner, even after they filed for bankruptcy.

Creditors can request payments from partners

If one partner files for bankruptcy, it doesn’t automatically mean the partnership is dissolved. The business entity will continue to exist, but the debts and liabilities of the partner are now shared by all of the partners. Florida law allows creditors of an individual partner’s personal estate to pursue payment from any other partner. If a creditor pursues payment against one member of a partnership and obtains a judgment, that judgment can be enforced against any other member of the partnership.

An executory contract is still valid

If one of the partners in an LLC files for bankruptcy, those partners may still have a say in how the company is managed. This clause is because an executory contract is still valid even if one of the parties files for bankruptcy. In some cases, such as when there are multiple creditors, it may be a good idea to file Chapter 11 instead of Chapter 7.

Tax returns are not suspended during bankruptcy

Florida law does not suspend the obligation of an individual’s tax returns during bankruptcy. However, the IRS may require a trustee appointed in a bankruptcy case to file and pay any taxes due on behalf of the debtor. The trustee is required by Florida law to make payments on behalf of a debtor, including state payroll withholding taxes or personal income tax withholding.