German YusufovJune 1, 2025

Patents, copyrights, trademarks, and trade secrets often form the backbone of a business’s value. Yet, when financial difficulties lead to bankruptcy, many owners wonder whether they will lose these critical assets or how they can retain control.

At Yusufov Law Firm, we assist Arizona businesses and individuals facing bankruptcy, helping them navigate how intellectual property (IP) is treated during these proceedings. This article clearly outlines what happens to IP owned by debtors and provides practical insights for protecting these vital business assets.

Intellectual Property in the Bankruptcy Estate

When someone (whether an individual or a business) files for bankruptcy under Chapters 7, 11, 12, or 13, all their assets, including intellectual property rights, usually become part of the “bankruptcy estate.” This means that patents, trademarks, copyrights, and trade secrets are handled similarly to physical assets like inventory or equipment.

The trustee or debtor-in-possession appointed in a bankruptcy case will decide whether to keep, sell, or abandon the IP based on what maximizes value for creditors and aligns with bankruptcy laws.

Patents, Trademarks and Copyrights

Patents, trademarks and copyrights are straightforwardly included in the bankruptcy estate. The trustee or debtor-in-possession might sell these rights to repay creditors, or they might retain and exploit these rights themselves to generate ongoing revenue.

Owners who wish to maintain control of their patents, trademarks or copyrights often propose reorganization plans under Chapter 11 or Chapter 13. These plans let the debtor keep ownership of their intellectual property by restructuring debts and using income from the IP to repay creditors.

Licensing Agreements

  • IP licenses (agreements granting the right to use IP) are often considered executory contracts, meaning both parties still have ongoing obligations.
  • The bankrupt company (debtor) can choose to assume (continue) or reject (terminate) these licenses.
  • If a debtor is the licensee (i.e. it licenses IP owned by a third party), and rejects an IP license, the licensor (usually the owner of the IP) can assert a claim for breach of contract against the debtor, but that claim is usually treated like any other unsecured debt, and can be eliminated in bankruptcy
  • If a debtor is the licensor (i.e. it owns the IP that is licensed to someone else), and rejects an IP license, Section 365(n) of the U.S. Bankruptcy Code offers certain protections to the non-debtor licensee. This allows the licensee to keep using the IP, even if the license is rejected, as long as they continue to pay royalties and uphold their end of the agreement.

Executory Contracts

  • Beyond IP licenses, many other types of agreements fall under the definition of an executory contract in bankruptcy.
  • The debtor can generally assign (sell) these contracts to a third party, even if the contract has clauses that would typically prevent this upon bankruptcy filing.
  • However, there are restrictions on assigning non-exclusive IP licenses without the original licensor’s consent.

Asset Sales

  • Section 363 of the U.S. Bankruptcy Code allows debtors to sell significant assets outside of a formal reorganization plan, including entire IP portfolios.
  • These sales often occur through court-approved auctions, generating immediate cash for the bankruptcy estate.
  • A major benefit for buyers is acquiring the IP “free and clear” of existing liens and claims, providing clear ownership and reducing future legal risks. For the debtor, these sales are vital for paying off debts and administrative costs, leading to a more efficient resolution of the bankruptcy case.

Protecting Intellectual Property Rights in Bankruptcy

To safeguard your IP during bankruptcy, proactive measures are essential:

  • Clearly Document Ownership: Proper documentation and timely registration with entities like the U.S. Patent and Trademark Office strengthen your claim.
  • Engage in Bankruptcy Planning: Strategic pre-bankruptcy planning can help position your IP favorably, potentially exempting certain rights from liquidation.
  • Reorganization Strategies: Under Chapters 11 or 13, debtors can usually keep their IP by demonstrating viable repayment plans, frequently utilizing the IP as an ongoing income source.
  • Understand the Role of Trustees: Knowing how trustees assess value and decide the fate of IP helps businesses effectively communicate the asset’s value and negotiate advantageous outcomes.

How We Can Help

Going through IP issues in bankruptcy requires informed and prompt actions. At Yusufov Law Firm, we specialize in guiding Arizona-based debtors to protect and maximize the value of their intellectual property during bankruptcy.

For personalized advice on securing intellectual property during bankruptcy, contact Yusufov Law Firm at (520) 745-4429 or visit our Contact Page.

We help you find clear paths forward, maintaining your business’s most valuable assets.