Does Declaring Bankruptcy Change Intellectual Property Rights?

When a person declares bankruptcy, it means they’re out of money. You might already have an idea of what happens when a person goes bankrupt. Any large assets — such as a personal vehicle or home — will be sold to pay creditors as great a sum as possible before the court wipes the remaining debts clean. But what happens when your primary assets are intellectual properties. Does the law force you to sell them?

The short answer is this: it depends on whether or not the IP in question is exempt by law.

But there are a number of scenarios regarding IP and bankruptcy. Let’s say, for example, you license a particular IP from an individual who then files for bankruptcy. That license will be considered by law to be an executive contract — so long as it’s exclusive to you. There are a couple different options in this case. You can sue in court for breach of contract in order to have the license terminated (which would eliminate any need to continue paying royalties for the IP). Or you could keep your rights to the IP and continue to uphold the contract. Usually, there’s no reason not to take the latter option.

If the reverse were to happen — the person who purchased the IP entered bankruptcy — then it would make far more sense from a legal standpoint for the other party to terminate the contract (because they won’t be paid for licensing it out). 

Generally speaking, let’s say you own an intellectual property worth nothing right now, but you expect it to become valuable in the future. You go into bankruptcy. Do you have to sell that IP?

Here’s what you should know: you have the right to sell IP during a bankruptcy proceeding. The court overseeing your case will need to approve your sale, but overall, that power to sell an asset to pay creditors is yours. Creditors also have rights and might ask the court to force you to sell an IP. More than likely, a creditor who knows about a valuable IP you haven’t yet sold will try to take out a security interest on that property. 

What is a security interest? Essentially, the interest is placed on a particular asset by a creditor to say “this is collateral for the loan we gave you, and it’s ours now.” The security interest can be placed on many assets, like a home or car, but is usually placed before a bankruptcy and not afterward.

As with all forms of business litigation, the plaintiff is required to prove his case in civil court. The burden of proof is always on the plaintiff, and not the defendant. The good news is this: that burden isn’t as great as it is in criminal court, and the plaintiff need only convince the judge or jury that the facts make the argument more likely to be true than untrue. 

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