How Does Bankruptcy Affect Your Intellectual Property Rights?

We’ve all been affected by the pandemic in equal parts disbelief in horror. Not all of us have had to deal with the loss of a loved one. Others have lost their jobs or been forced to close down their business for fear of bankruptcy. Bankruptcy filings had already catapulted upward about 120 percent from 2019 levels by August of 2020 — and they weren’t showing signs of slowing down. And it’s bankruptcy that has impacts that are neither seen nor heard.

Here’s how bankruptcy affects your intellectual property rights. Pay close attention if you might be dangerously close to claiming bankruptcy yourself, because having all the facts will help you avoid some of the risks commonly associated with a Chapter 7 personal option.

When filing for either a Chapter 7 or Chapter 11 bankruptcy, a few things happen all at once. Basically, the bankruptcy means that a new “estate” is created. This estate consists of all of your old estate’s assets. This shift means that the resources are defined differently and you’re only partially responsible for paying what you owe (i.e. you’ll pay what you can, but probably not everything). 

The Chapter 7 bankruptcy filing only exists to expedite liquidation of assets to pay creditors. Court generally appoints a trustee to make all this happen in a timely manner — and that trustee controls the new “estate.” Not you.

The Chapter 11 filing is somewhat different. Instead of leaving the debtor in financial ruin, this filing could leave a person on their feet. The same goes for a larger corporation. The debtor has more control over the process, and is allowed to reorganize assets or continue to operate in order to have a better chance to reduce debt over a short period of time. 

There are a few things to keep in mind about bankruptcy and your own rights. First, owning intellectual property commonly results in litigation. Other businesses want what you have, and they’re willing to test the law by taking you to court. But here’s the thing: when you file for any type of bankruptcy, court cases generally get put on hold. There are a number of exceptions, but in general it’s one way to pause a case.

The stay  is meant to prevent “different creditors from bringing different proceedings in different courts, thereby setting in motion a free-for-all in which opposing interests maneuver to capture the lion’s share of the debtor’s assets.”

Perhaps more interestingly is that the debtor still preserves their right to sue. Keep in mind, “There is…no policy of preventing persons whom the bankrupt has sued from protecting their legal rights.” This is a relevant legal matter for some who believe they can game the system — for example, some ballsier corporations have used bankruptcy as a legal gambit to prevent a lawsuit from moving forward only to countersue. They rarely work the way the debtor thought they might. Defendants always preserve the right to defend.

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