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How franchise agreements are treated in bankruptcy

On Behalf of | Mar 18, 2022 | Bankruptcy

Buying a franchise may be an effective way to become a successful business owner. However, if you file for bankruptcy in Kentucky, there is a chance that you will lose your franchise during or after the case has been discharged. Let’s take a deeper dive into what might happen if you are a franchisee who is seeking protection from creditors.

What happens if you file for Chapter 7 bankruptcy?

When you file for Chapter 7 bankruptcy, all of your nonexempt assets are liquidated. In most cases, you are required to liquidate any assets owned by your company in an effort to repay your creditors. Depending on the circumstances in your case, the contract that you have with your parent company may be nullified after filing a bankruptcy petition.

What happens if you file for Chapter 11 bankruptcy?

Filing for Chapter 11 bankruptcy requires you to create a reorganization plan that aims to pay off as much of your debt as possible. Assuming that this plan allows you to remain in good standing with your parent company, you will likely be able to continue running your business. You will also need to prove to the court that allowing you to retain control of your business makes sense from a financial standpoint.

Franchise agreements may be covered by an automatic stay

If you file for business bankruptcy, it’s unlikely that your parent company will be able to take action against you until the case is over. However, after a discharge occurs, this entity may be able to terminate your contract or otherwise take over your franchise. At that point, you may owe fees, fines or penalties if filing for protection from creditors caused you to violate your franchise agreement.

Bankruptcy may allow you to eliminate or reduce your debt without losing assets such as a franchise. Furthermore, obtaining an automatic stay against creditor collection activities may give you the leverage needed to renegotiate the terms of a franchise agreement before it is terminated by the parent company.