© C in a Circle - Copyrights in Bankruptcy: When Seven Is Not Your Lucky Number
When people think of assets, they usually consider their house, car, furniture, bank accounts and the like. But copyright owners, or persons who receive royalties generated by copyrights, hold a class of assets that doesn’t readily come to mind as such because they are not tangible and tend to be forgotten. Yet they, too, become part of what is called your bankruptcy “estate.”
By Gary Roth
In these difficult economic times, some of you may find your own financial situation to be so severe that you are considering filing for bankruptcy. Although not the stigma it was decades ago, bankruptcy nevertheless is a drastic measure that should not be done without a lot of thought and legal advice. Although it often is said that a bankruptcy filing gives you a “fresh start” to wipe your debts clean and move forward without that burden, it is important for you, as a composer or copyright owner, to know what happens to all those songs you wrote when you do. You may be surprised.
It is not my intention to give you a primer on bankruptcy law here. But the basics are these (“Chapter” references are to chapters in the US Bankruptcy Code): If you have a steady income but still are financially underwater, the experts usually recommend filing a Chapter 13 bankruptcy, in which you make regular reduced payments to your creditors. If you are a business and want to continue operating, Chapter 11 is the way to go. Most individuals who need to extricate themselves fully from a financial crisis and start over file for Chapter 7, also called liquidation. Since the law was amended a few years ago, however, this is not as easy as it had been: There is a means test that is applied to determine if you are eligible, and you have to show that you can’t pay your debts as they’re due as well as that you have tried to resolve your problems with your creditors. If you pass these tests, you can file a Chapter 7. If you don’t qualify, you will be required to use Chapter 13.
Most people using Chapter 7 do so because they have few, if any, assets to lose and they can undertake their new financial life much more quickly once the court cancels their dischargeable debts. Let’s say that, unfortunately, your situation is indeed dire, you need the protection bankruptcy affords and you qualify for Chapter 7. The court will appoint a Trustee to administer your case. His or her job is to gather your assets, turn them into cash and pay off your creditors, usually at less than 100 cents on the dollar.
When people think of assets, they usually consider their house, car, furniture, bank accounts and the like. But copyright owners, or persons who receive royalties generated by copyrights, hold a class of assets that doesn’t readily come to mind as such because they are not tangible and tend to be forgotten. Yet they, too, become part of what is called your bankruptcy “estate.” And the Trustee has the right under the law to receive any income generated by all of the assets of the bankruptcy estate. The benchmark for this transfer of ownership is the date that you filed your Chapter 7 petition. Therefore, all copyrights and copyright-related rights that exist on the filing date are “pre-petition” and become a part of your bankruptcy estate. All new copyrights you create or rights you acquire after the filing date are “post-petition,” fall outside of your bankruptcy case and become part of your new freshly started financial life, with the rights and income staying with you.
Think about that. You have written music for many years and have been getting performance royalties from BMI, ASCAP or SESAC, mechanical royalties from your publisher or directly from licensees, been receiving a share of license fees for synchronizations, downloads and more. None of that future income, if it comes from a pre-petition composition, any longer belongs to you. Instead, it belongs to the bankruptcy estate.
But as you well know, the income sources I’ve described mostly come to you only a few times a year and in varying amounts. At most, a Trustee will only be able to make a reasonable estimate of what he can expect to receive in the future. If the royalty stream is large and your debts are not massive, a few quarters of payments to the Trustee from all those sources may allow him to pay off your creditors and wrap up the case. If that happens, your rights would likely be returned to you.
More probable, however, is that the periodic income the Trustee receives will not pay off your debts for years and years. With rare exceptions, a Trustee is not inclined to keep your case open for so long a time. What he is more likely to do is gather as much money as he can right now, make reasonable payments to your creditors and then close the case. He cannot force your PROs, publishers or licensees to make early payments to him, but he can, as the legal representative of the bankruptcy estate, sell the right to get that income as it becomes payable in the future.
Many Trustees have a stable of persons known to invest in bankruptcy assets who they will contact and ask for bids, naturally seeking the highest bidder. Or he or she may put an ad in trade publications or targeted websites announcing a sale of the (your) copyright rights that are in the estate. The Trustee’s goal is to get as much for your assets as soon as possible, pay your debts with the cash and close your case. The end result is that persons who are strangers to you, but offer enough up front to satisfy the Trustee, will end up owning the income rights to your songs.
Your pre-petition compositions could continue to generate royalties for years. That’s presumably what you were counting on when you wrote them. It also is what would make them attractive to a purchaser, who will see your songs as a continuing income-generating asset for themselves, for the life of the copyright (your lifespan plus 70 years) or the length of the contract you are being paid under, that can be bought at a bargain price. The purchaser puts up today the lump sum of money that the Trustee wants to close the case expeditiously. That buyer is willing to wait to recoup (and hopefully exceed) his investment over the royalty distribution periods ahead.
(You also could bid to buy back your copyright rights from the Trustee if you could come up with enough money to do so, but if you had enough money to buy your rights back you probably wouldn’t have had to file for Chapter 7 in the first place!)
Armed with a court-approved transfer document from the Trustee, the buyer would present it to your PRO and other royalty payers so that he or she can start receiving the income that you used to get on your pre-petition works. You are still the attributed writer of the songs, of course, but if you owned your own publishing rights in them, the buyer can move them into his own publishing house since he acquired legal title through the bankruptcy sale.
If your copyrights don’t earn much and no investor sees any significant future value in them, the Trustee may be unable to make a sale and then declare your case a “no-asset” case, in which case he essentially gives you back your copyrights and related rights.
The upshot of all of this is that what you create is your “property” and when you get financially squeezed into bankruptcy, that property becomes part of the package of assets that is used to pay off your creditors. If you ever find yourself contemplating bankruptcy, don’t forget about that. Many songwriters have filed Chapter 7 without realizing that every pre-petition song they own or song income right they have acquired likely will end up being taken away forever by other people who bought them as an investment.
I wish you all the ability to overcome any financial problems with a minimum of adverse consequences and without having to resort to filing for bankruptcy. But if, alas, you have no choice but to go the Chapter 7 route, at least now you’ll know what lies down that road.
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