Protecting Intellectual Property During Chapter 11 Bankruptcy

 Posted on September 14, 2025 in Chapter 11 Bankruptcy

The most valuable asset for most Texas companies that deal in technology is probably not office space, office furniture, or even venture capital. Intellectual property may be the most valuable asset the company has, as patents, software code, proprietary data, trademarks, and similar intellectual property form the core of the entire business.

What happens when a tech company or tech startup faces financial collapse and files for Chapter 11 bankruptcy?  Will the reorganization of business debts protect intellectual property from creditors? The answer to this question is not simple or straightforward. While Texas bankruptcy courts do treat IP assets somewhat differently from traditional assets, IP is primarily governed by federal bankruptcy laws and will depend on who owns the IP and the type of property involved.

Because this is a complex issue, it is crucial that you consult with an experienced Houston, TX Chapter 11 bankruptcy attorney. This is definitely not a time you want to attempt a DIY bankruptcy, as you would place your valuable intellectual property at risk by not seeking knowledgeable legal advice.

Intellectual Property as an IT Company’s Core Asset

In the information technology (IT) industry, intellectual property is often the primary source of value for a company. IT firms rely on intangible assets rather than physical inventory to gain a competitive edge.  The key types of intellectual property for IT companies include:

• Copyrights, which protect original works of authorship, including source code of a software program, user interfaces, website content, and documentation.
• Patents that protect technological innovations, including software patents, utility patents, and design patents
• Trade secrets that cover confidential business information, such as non-publicly disclosed source code, customer data, formulas, manufacturing processes, and proprietary algorithms.
• Trademarks protect a company’s brand identity, including the business name, logo, and slogans, which help build brand recognition.

Strong IP gives companies a competitive advantage, generates revenue, increases the value of the company, and enhances negotiation power.

How Can Texas Chapter 11 Protect or Expose Intellectual Property?

It is important to note that there is a distinction between company-owned IP and investor-owned IP rights during Chapter 11 bankruptcy.  Special considerations for IP include patents and trademarks. Federal patent law generally prohibits the assignment of a non-exclusive patent license without the licensor's consent, and non-exclusive trademark licenses are typically not assignable without the licensor’s consent.   

Suppose the debtor is also the owner or licensor of the intellectual property. In that case, IP, such as copyrights and trade secrets, can generate cash during reorganization by selling or licensing the IP (with court approval). A debtor who is the owner or licensor of the IP can use it as collateral to secure post-petition financing to garner operating capital. The lender may be given a court-approved "superpriority" lien on the IP assets.

Chapter 11 bankruptcy can also potentially expose intellectual property. If a company has pledged its IT as collateral for a loan and then files for bankruptcy, the lender can foreclose on the IP if the company defaults.  Although less common in Chapter 11, a failed reorganization can result in the liquidation of the debtor’s assets, including intellectual property, to pay creditors.

In short, there is always the risk that creditors will push for IP liquidation to satisfy debts. Secured creditors may hold liens on patents or software, and venture capitalists may demand IP collateral in financing agreements. There is a risk of disputes between founders and investors when Chapter 7 bankruptcy is filed. Creditors may be negotiated with to preserve licensing agreements, or Subchapter V for small businesses may be used to streamline IP protections.

Contact a Harris County, TX Chapter 11 Bankruptcy Lawyer

Since the loss of IP can mean a total loss of business identity, having a skilled Houston, TX bankruptcy attorney from The Fealy Law Firm, PC can make a significant difference in the outcome. Attorney Fealy focuses her practice on helping good people through hard times. Circumstances beyond your control can cause bankruptcy, and our firm is here to help you regain control of your finances and your future. Call 713-526-5220 to schedule your free consultation.