Going into a partnership for your business can be a beautiful thing. There are shared responsibilities in both equipment and expenses as well as the complementary skill sets that you and your partner have to offer. As with most cases, in order to gain something you have to sacrifice another. With a partnership this is the freedom to make mistakes or even succeed as an individual.
You and your partner have been working together for a while but unfortunately life occurs and things have not been going well for him personally and financially. Maybe he has made bad investment decisions? Maybe he’s just a terrible gambler? No matter the reasons he now has to file for bankruptcy. Naturally your partners’ misfortune saddens you, but your main concern is can his personal bankruptcy affect the business.
When a partner of a business has to file for personal bankruptcy, a trustee may file for a charging order against his interest of the business. This would enable the trustee to attain the profits that would otherwise be paid to him. In certain cases a business may not habitually dispute profits to its members so a charging order would be in vain. If this is the circumstance, the trustee will then take over the economic rights in order to receive income from the partnership. The trustee can assign or sell the economic rights to your ownership interest as well but typically cannot sell your share of the business.
With this said, it may be best to dissolve the partnership, meaning sign a buy-sell or buyout agreement that requires a co-owner who faces bankruptcy to inform other co-owners before filing. This becomes an offer to sell the bankrupt owner’s interest back to the other owners. The buyout money goes to the bankruptcy trustee and the business can proceed without difficulties.
The above remedy is just a precaution, a worst case scenario. Usually most states prohibit the trustee from interfering with the partnership or LLC or taking its assets.