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Royalties During Bankruptcy

March 27, 2013

Revenue generated by property is part of your bankruptcy estate. This includes any earnings produced by contracts that were in effect when you filed for bankruptcy. For instance, if you signed a record contract and wrote a hit song, any royalties you collect after filing bankruptcy are part of your bankruptcy estate.

In a Chapter 7, the bankruptcy trustee will examine your assets to determine if anything may be liquidated to pay your unsecured creditors. The bankruptcy trustee has the right to step into the shoes of the debtor and receive any income generated by all of the assets of the bankruptcy estate. All copyrights you own at the time you filed bankruptcy, or royalties you are entitled to receive become part of your Chapter 7 bankruptcy estate.

When considering a royalty stream of income, the trustee must decide if collecting these royalties and keeping the bankruptcy estate open is in the best interest to your creditors. If the revenue stream is small and infrequent, the trustee will likely abandon her interest and return the asset to you. In some cases the trustee may attempt to sell your right to receive royalties, or the copyright itself. The trustee’s goal is to get as much for your assets, pay your debts, and close your case soon as possible.

Most royalty agreements arise from executory contracts. An executory contract is a kind of incomplete or pending contract. For instance, the debtor may have an executory contract to write a book with a book publisher. The debtor/author may receive an advance, but a contract is pending to complete the book and receive royalties from the sale of the finished book. In this case, the author’s right to royalties only “vests” in the executory contract after the book is written. Consequently, the royalties from this unwritten book are not part of the bankruptcy estate because the contract is still pending when the debtor/author filed bankruptcy. The trustee is unable to complete the personal services required by this particular executory contract. Furthermore, the trustee cannot force the debtor/author to complete the book.

Royalties can quickly complicate a bankruptcy case. Your bankruptcy attorney can determine the best way to protect your royalties from creditor collection.




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