When a business faces bankruptcy, the focus often shifts to settling debts and liquidating assets. Amid the financial turmoil, one critical — yet often underestimated — asset class stands out: intellectual property (IP). Trademarks, patents, copyrights, trade secrets, and domain names can hold significant value, even when physical operations grind to a halt. Understanding how IP is treated during bankruptcy can make a major difference in preserving or maximizing the value of these intangible assets.
Understanding Intellectual Property in Bankruptcy
Intellectual property refers to creations of the mind that are protected by law, allowing the business to derive commercial benefit from innovation, branding, and creativity. Common types include:
-
Trademarks – Brand names, logos, slogans
-
Patents – Inventions and new technologies
-
Copyrights – Original content such as text, designs, videos, or software
-
Trade Secrets – Proprietary processes, formulas, client lists, and strategies
In bankruptcy proceedings, IP is considered a non-physical asset — but it is still part of the debtor’s estate and subject to review by the bankruptcy court.
Types of Bankruptcy and IP Treatment
1. Chapter 7 (Liquidation)
In a Chapter 7 filing, the business ceases operations and its assets — including IP — are sold to pay creditors. The court appoints a trustee to oversee the process.
-
IP Valuation: The trustee will assess the market value of IP. Trademarks or patents with active licenses or customer recognition tend to hold more value.
-
IP Sale: IP assets can be sold individually or bundled with other business assets to interested buyers, competitors, or investors.
2. Chapter 11 (Reorganization)
Chapter 11 allows the company to continue operating while reorganizing its debts.
-
IP as a Tool for Recovery: A company may leverage its IP to attract financing or restructure operations around its most profitable intangible assets.
-
IP Licensing: The business may renegotiate or continue licensing agreements, generating revenue while in bankruptcy protection.
Protecting Intellectual Property During Bankruptcy
1. Maintain Proper Registration
Before bankruptcy is even on the horizon, businesses should ensure their IP is properly registered and documented. Registered patents, trademarks, and copyrights are easier to value and sell.
2. Isolate IP Assets
Creating a subsidiary or holding company for intellectual property can help shield these assets and streamline valuation or licensing.
3. Monitor Licensing Agreements
If the business has licensed its IP, these agreements can be impacted during bankruptcy. In many cases, licenses may be assumed (continued) or rejected (terminated), affecting both licensors and licensees.
4. Use Non-Disclosure Agreements (NDAs)
If IP includes trade secrets, NDAs with employees and business partners are critical. Bankruptcy doesn’t eliminate the importance of safeguarding confidential information.
Selling IP in Bankruptcy
Selling intellectual property during bankruptcy requires a strategic and legally sound approach:
Valuation
Engage IP valuation experts to assess what the IP is worth. Factors include:
-
Revenue generated from IP
-
Brand recognition
-
Market demand
-
Existing licensing deals
Finding Buyers
Potential buyers include:
-
Competitors
-
Investors
-
Technology firms
-
Private equity groups
In some cases, the entire business (including IP) may be sold as a going concern, preserving value and continuity.
Court Approval
Any significant sale of assets during bankruptcy must be approved by the court, ensuring transparency and fairness to creditors.
The Role of Legal and IP Advisors
Bankruptcy law intersects with intellectual property law in complex ways. A specialized legal team can:
-
Navigate IP transfer or licensing issues
-
Handle disputes over ownership or usage rights
-
Maximize asset value through structured deals or auctions
-
Protect trade secrets throughout the process
Final Thoughts
Bankruptcy is undoubtedly a challenging process, but intellectual property can be a beacon of value in an otherwise bleak financial picture. Whether used as leverage in reorganization or sold during liquidation, IP deserves focused attention. Proper planning, protection, and strategic handling of IP assets can help businesses salvage value, satisfy creditors, and lay the groundwork for future ventures — or even a fresh start.
