Family Limited Partnerships and Bankruptcy

Our clients frequently ask if a limited partner could lose its limited partnership interest through a bankruptcy. The answer is entirely dependent on how the partnership agreement was drafted—and provided that the agreement is sound and professionally designed—the answer is typically "no." That being said, a bankruptcy trustee could conceivably claim any paid-in capital contributions to the LP that the bankruptcy partner is entitled to withdraw. For this reason, each limited partnership agreement should be carefully reviewed by an insolvent partner's attorney far in advance of a bankruptcy filing.

The bankruptcy of a general partner does not transfer the managerial authority to their bankruptcy trustee, but the bankruptcy can (and typically does) cause a significant disruption in the smooth or continuous management of the partnership. For this reason, any general partner contemplating bankruptcy should be replaced with the guidance of a skilled legal advisor.

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