What Happens When a Texas Franchisee Files Bankruptcy?

 Posted on August 31, 2025 in Bankruptcy

For those who want to own a business in Texas, a franchise can be a viable option. Franchises are found in various types of businesses: restaurants, retail stores, and service-based companies. Like any business, franchises face financial risk. Should revenues drop, debts can accumulate, and bankruptcy may well be the only option.

Bankruptcy for a franchisee has some different aspects when compared to "regular" small business bankruptcy. You must understand the differences if you are considering bankruptcy for your franchise, because the franchise agreement and relationship with the franchisor can complicate everything. When you have an experienced Liberty County, TX bankruptcy attorney guiding you through the process, you can rest assured that it will go smoothly.  

What Are Some Bankruptcy Options for Texas Franchisees?

Franchise agreements are legal, binding contracts between a franchisee and a franchisor. A franchisor is an established business that sells the right to operate under its brand (like McDonald’s or Merry Maids). The franchisor is an independent owner who purchases the right to operate his or her business under the franchisor’s branding, business model, and systems in exchange for royalties and fees.

The franchisee invests capital and labor to operate the franchise on a day-to-day basis, while the franchisor provides marketing assistance, training, and support. Bankruptcy can introduce questions about whether franchisee/franchisor contracts must be terminated, modified, or rejected. Both Texas bankruptcy laws and federal bankruptcy laws govern the treatment of these contracts. The bankruptcy options for a franchisee include:

•  Chapter 13 bankruptcy for individuals and sole proprietors may apply if the franchise is not owned as a corporation or LLC, but rather as a sole proprietorship.

• Subchapter V, also known as the Small Business Chapter 11, can be a streamlined way for small Texas franchisees to reorganize with fewer complications than Chapter 11.

• Chapter 11, also known as reorganization, allows a business to continue operating while its debts are restructured. Chapter 11 is generally used for larger franchisees.

• Chapter 7 bankruptcy would require the business to close, all assets would be liquidated, and debts would be discharged. At the same time, the franchise agreement would normally be terminated.

How Franchisors Respond to Bankruptcy Filings from Franchisees

Franchisors can potentially object to contract assumption if the franchisee is unable to demonstrate that he or she can continue operations. In some cases, the franchisor may seek to regain control of the location, particularly in high-value markets in Austin, Houston, or Dallas. Bankruptcy can also affect business practices tied to the branch, supply contracts, and even trademarks.  

Bankruptcy laws (Title 11, U.S. Code) generally allow a debtor to assume or reject franchise agreements, assuming the franchisor agrees. Other potential scenarios include assumption, which means the franchisee continues under the contract but must cure all defaults, like unpaid royalties, and rejection, which terminates the contract and allows the franchisor to file a claim for damages. Some franchise agreements contain termination upon bankruptcy clauses (ipso facto clauses), but bankruptcy courts are generally unable to enforce these clauses.

Adding Creditors, Employees, and Customers Into the Bankruptcy Mix

When a franchisee files for bankruptcy, creditors may seek to repossess equipment or file creditor claims during the bankruptcy. As far as employees who are owed wages, bankruptcy courts prioritize employee wage claims up to a statutory limit.

Considerations for Texas Franchisees Going Through Bankruptcy

When a Texas franchisee files for bankruptcy, it can open the door to negotiations with creditors and franchisors. Subchapter V of Chapter 11 could be a good option, as it allows the franchisee to continue business operations while also reducing debt. Bankruptcy filings do not erase a franchisee’s obligations to follow franchise rules. Franchisees considering bankruptcy should seek legal guidance to avoid any potential missteps that could sacrifice assets.

Contact a Liberty County, TX Bankruptcy Lawyer

If you are a franchisee facing financial debt and possible bankruptcy, a Waller County, TX small business bankruptcy attorney from The Fealy Law Firm, PC can guide you through the process with the best outcome possible.  We will help you negotiate with your franchisor and pursue a strategy that best protects your business and your future. Our focus is on helping good people through hard times. Call 713-526-5220 to schedule your free consultation.