Intellectual Property in Bankruptcy

by the Phoenix bankruptcy lawyers at Ariano & Reppucci

Your debts are piling up and you feel overwhelmed. Bankruptcy is becoming a very likely option to discharge your debts or to help you come up with a plan to pay them off. If your debts are much higher than your assets, you could probably qualify for a Chapter 7 bankruptcy to wipe out your qualifying debts in exchange for your non-exempt assets. This makes sense when it comes to your vehicle (minus the state exemption amount) or your house (where you can exempt $150,000 of equity). However, things become more muddled when it comes to your preliminary patent that you filed on a great invention you have as the backbone of your new business or the copyright on your new sound recording.

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Intellectual property comes in four basic forms and stems from the efforts and ideas a person has. The most common forms are patents, trademarks, copyrights, and trade secrets. Patents are temporary twenty (20) year monopolies granted over certain inventions in exchange for a full disclosure of the invention and how to make such invention. A patented invention must be new, useful, and non-obvious and is usually a machine, composition of matter, or item of manufacture.

Trademarks are marks, logos, symbols, or other non-generic names that point to a specific source. Some examples of trademarks include the Google logo, Microsoft’s logo, or the Toys R Us name. Trademarks can be federally registered for more protection but do not have to be. Trademarks can last indefinitely as long as they do not infringe on other trademarks or lose their meaning by becoming generic (such as the brand name Kleenex).

Copyrights exist the moment you create an original work of authorship fixed in a tangible medium. Examples of copyrighted works include music, sound recordings, fashion designs, computer software, books, art, and video games. You can also register a copyright with the United States Copyright Office for more protection. Copyrights have a long duration of protection – your life plus 90 years.

Trade secrets are formulas, client lists, algorithms, or any other secret that derives its economic value from being kept secret. Common examples of such intellectual property include Coca Cola’s recipe and Google’s search algorithm. Trade secrets only last as long as they are kept secret.

Do I have to list my intellectual property on my bankruptcy petition?

When you declare bankruptcy you have to disclose your non-exempt assets to the bankruptcy trustee. Whether you are a business or an individual, intellectual property can form a large part of your asset portfolio. Intangible assets can form the backbone of many company’s value or business models. Further, whether or not you are a business or an individual, you can also license out your intellectual property or receive royalties on your protected work. Intellectual property law and bankruptcy law can often clash because one thrives on encouraging ideas and invention while the other is about creating a fresh start or a repayment plan to creditors over a period of time.1

A lot depends on the type of bankruptcy you are declaring as well. If you file under Chapter 7 of the Bankruptcy Code you will be filing a liquidation proceeding so you can discharge your debts. Your non-exempt assets will become part of the bankruptcy estate, which your bankruptcy trustee will use to repay your listed creditors. You will need to include all personal property on your Schedule B, describe the location of the property, and its fair market value.2 Intellectual property is part of that personal property.3

Under Chapter 13 of the Bankruptcy Code, you create a repayment plan which lasts between three to five years. This court-approved plan will then be used to pay back your creditors in a way you can afford. You will also have to list your personal property in your disclosures, but you will be able to keep them and pay off creditors slowly.

If you are filing for a Chapter 7 or Chapter 13 bankruptcy and you have intellectual property as some of your personal assets, you should contact an Arizona bankruptcy attorney. Your attorney will be able to guide you through the bankruptcy process, including what to do with your intellectual property on bankruptcy petitions.

[1] See Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 Berkeley Tech. L.J. 733, 741 (2007).

2 Chapter 7 Bankruptcy Estate,, (last visited Dec. 4, 2014).

3 Id.