When a business enters financial trouble, creditors often look for any available assets to recover what they are owed. In some cases, this includes intellectual property as a patent lawyer knows all too well. Patents, like physical property, can hold significant value and may become targets for collection. The question is whether creditors can legally seize patents as part of debt recovery — and if so, how that process works.
Patents As Business Assets
Patents are considered intangible property. They give the owner the right to exclude others from using, selling, or manufacturing a certain invention for a fixed period. Because of this legal exclusivity, patents often represent real commercial value. A company might not have many physical assets, but its patent portfolio could represent years of research and development. That value makes patents a legitimate part of what creditors may seek when attempting to collect unpaid debts. Think of it this way, patents can make a business valuable when selling it, so it can also be valuable to creditors.
Perfecting A Security Interest
Before a creditor can lay claim to a patent, they typically need to have a security interest in it as a Chapter 7 bankruptcy lawyer can explain. This means the creditor and debtor have a prior agreement that the patent serves as collateral for a loan or other obligation. To make this security interest enforceable against third parties, the creditor usually files a UCC-1 financing statement with the appropriate state office. That means if you do not have this agreement in place, creditors should not have access to it in most cases — but not all.
It’s worth noting that while patent ownership is recorded with the U.S. Patent and Trademark Office (USPTO), recording a lien or security interest there is not required for it to be valid. Filing through the USPTO can provide additional public notice but doesn’t replace the need to comply with state commercial law.
What Happens In Bankruptcy
If the business files for bankruptcy, the rules change. Once a bankruptcy case is filed, an automatic stay goes into effect. This temporarily prevents most creditors from seizing or selling any property of the debtor — including patents — without court approval.
During bankruptcy proceedings, patents are treated like any other asset. If they are part of the bankruptcy estate, the court will decide whether they are sold, licensed, or otherwise used to pay creditors. In Chapter 7 cases, a trustee may liquidate the patent. In Chapter 11, the patent could be part of a restructuring plan. Any creditor with a valid and perfected security interest in the patent would have priority over unsecured creditors when proceeds are distributed.
Involuntary Seizure Outside Bankruptcy
In situations where bankruptcy has not been filed, a creditor might still try to seize a patent through a court judgment. After receiving a judgment, the creditor can request a writ of execution, which allows for the seizure and sale of the debtor’s property, including intellectual property. However, this process can be more difficult and time-consuming than seizing tangible assets, especially if the patent has licensing restrictions or limited market appeal. This may only happen if the patent has sizable value.
Due Diligence And Legal Guidance
Both debtors and creditors need to understand how patents are treated in debt situations. Business owners who rely on patent rights for revenue may want to consider how those assets are protected in lending agreements or bankruptcy planning. At the same time, creditors need to assess whether the costs of enforcing a claim against a patent are worth the potential return.
Attorneys like those at COFFYLAW can attest to the importance of reviewing these issues early — whether you are seeking to protect your patent interests or evaluate your options during financial disputes.
Patent rights can be seized under certain conditions, but the process depends on prior agreements, state law, and the broader financial picture of the business. If your company holds valuable patents or is considering using them as collateral, working with a lawyer can help reduce legal and financial risk. If you are facing debt recovery issues involving intellectual property, it’s important to act with a clear strategy and professional guidance.