Hard and Soft Assets in Bankruptcy

In a bankruptcy, assets are either exempt or non-exempt. exempt assets are those the petitioner may keep. Each state varies on categorizing exempt assets and property. Exempt assets are delineated at Section 522 of the Bankruptcy Code and include homesteads, personal property and tools of trade. Non-exempt assets are those assets that go into the bankruptcy estate to be sold by the trustee who will distribute the proceeds to the secured creditors. Assets, whether exempt or non-exempt can further be categorized as "hard" or "soft."

Hard assets are physical and financial assets such as land, buildings, equipment, cash, or financial instruments. Soft assets are assets other than cash, property or equipment. Hard assets are more easily quantifiable and are usually accounted in inventory records. Soft assets in bankruptcy may include such intangibles as intellectual properties, licenses, business trade secrets, patents, receivables and technology. Soft assets also include a debtor's rights in uncollected monies and benefits.

The issue of intellectual property has been codified in Section 365(n) of the Intellectual Property Bankruptcy Act of 1988.

Bankruptcy Code - Section 522 (Exempt Property)

The following include property that can be exempted:

• real property used as a residence (homestead)
• motor vehicle(s)
• household furnishings and certain personal items such as books and apparel
• jewelry
• other non-homestead properties
• professional tools of trade
• health aids

The above may be considered "hard" assets as they are tangibles. Section 522 also delineates certain "soft" or intangible assets such as:

• interest in unmatured life insurance contracts
• a debtor's right to receive types of annuities including social security benefits; veteran's benefits; disability benefits; alimony and other support maintenance; pension or stock payments; and civil judgment awards.

Limited Scope of Section 365(n) - Intellectual Property

The bankruptcy code allows certain executory agreements to be enforced. Executory agreements are those agreements that are yet to be performed or whose performance is continual. In a highly technological society, soft assets such as intellectual properties are given as much weight as hard assets when it comes to possible liquid value. Agreements regarding intellectual properties are covered under Section 365(n) of the Bankruptcy Code in the case where a licensor goes bankrupt. Section 365(n) includes the following types of intellectual property:

• trade secrets
• patentable inventions and patent applications
• plant varieties
• works of authorship protected under U.S. copyright law
• mask works protected under Chapter 9 of the copyright laws (part of the Semiconductor Chip Protection Act of 1984)

Agreements regarding trademarks, trade names and service mark licensing arrangements are not covered under this section. Trademarks were specifically excluded by Congress because trademarks often depend on a licensor's obligation to maintain quality control over the trademark bearing products.

If a debtor/licensor rejects an executory license, under Section 365(n) a licensee has the option of retaining its original and supplemental rights under the license's provisions for its duration as well as any applicable extensions. Section 365(n) expressly provides that the licensee only retain those rights that existed immediately before the case commenced and has no rights in any intellectual property the licensor created after the bankruptcy filing.

Consult with an Attorney

If you need information regarding bankruptcy assets and how they are treated, consult with an experienced bankruptcy attorney to discuss the categorization of assets. An attorney will help guide you through some of the more confusing aspects of bankruptcy and help you avoid unnecessary obstacles.