A franchisee can terminate the agreement if a franchisor:
- Fails to provide training and support as stipulated in the contract
- Commits fraud or misrepresents the potential profits
- Fails to protect the franchisee’s business opportunity or territory
- Goes bankrupt or becomes insolvent
Can I file bankruptcy on a franchise agreement?
Many business bankruptcy cases are “no asset cases,” meaning that no proceeds are available for distribution. In the franchise context, this might be the case where the franchise agreement is worthless because it has already been terminated or abandoned and/or all assets are encumbered by liens.
What happens to an expired A&A franchise agreement in bankruptcy?
A franchise agreement that has expired by its own terms or that is properly terminated under state or federal law before a bankruptcy is filed is not protected, because it is not considered in force. Since the franchise agreement is no longer in existence, it will not be considered property of the estate when the bankruptcy case is filed. [ 13]
Can a franchisee-debtor terminate a franchise agreement?
A franchisor is prohibited from initiating or continuing any act to terminate a franchisee-debtor’s franchise agreement or take any other action that could diminish the franchisee-debtor’s rights without first obtaining relief from the automatic stay from the bankruptcy court, pursuant to Section 362 of the Bankruptcy Code.
What are executory contracts in a franchise bankruptcy case?
Examples of executory contracts routinely at issue in franchise bankruptcy cases include franchise agreements, certain service contracts, equipment leases and real property leases and subleases. [ 27]
When is a franchisee's termination deemed to be complete?
What is a business bankruptcy?
How to assume an executory contract?
How long do you have to file for bankruptcy?
What chapter does a business file under?
Can a franchisee file for Chapter 13?
Who are the creditors?
See 4 more
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The Bankruptcy Handbook for Franchisors and Franchisees
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What is Business Bankruptcy?
By definition, bankruptcy is the legal procedure businesses engage in when they cannot repay their debts.
What Are The Three Types of Business Bankruptcy?
Chapter 7 is the only form of business bankruptcy that is legally available to all types of businesses. You don’t have to meet any requirements to file.
Who Decides The Outcome of Bankruptcy Cases?
Business bankruptcy cases are settled in a federal court, so the outcome is determined by an appointed bankruptcy judge. The actual legal process is administrated by a trustee, i.e., an officer appointed by the United States Trustee Program of the Department of Justice.
How Long Does it Take to File for Business Bankruptcy?
The length of the entire bankruptcy process depends on the type. A sole proprietor who files Chapter 7 will likely be wholly discharged from their debts within four to six months. Chapter 13 is mostly filed by sole proprietors as well. For this reason, it usually doesn’t take more than six months to develop a reorganization plan and get it approved by a few creditors and the bankruptcy court. Depending on the plan’s terms, however, it could take anywhere from three to ten years for the filer to repay all of their debts.
How Does Business Bankruptcy Affect Credit?
Compared to other business entities, sole proprietors will take the biggest hit to their personal credit after filing for bankruptcy. Unlike registered entities like LLCs and corporations, sole proprietors have no legal distinction between personal and business debts. After all, you can’t expect to have your debts discharged without paying some price. Sole proprietors should expect to see their scores go down by at least 120 points, and the bankruptcy will stay on their credit report for at least seven years.
What happens if a business is unable to pay its debts?
A myriad of circumstances can render a business unable to repay their debts. What makes bankruptcy different than other possible solutions to this problem is the opportunity to start fresh. The debts you are unable to pay are forgiven, and your creditors are given some degree of compensation.
How to file for Chapter 11?
To file Chapter 11, your business must prove that it is currently generating steady revenue. You must also submit a reorganization plan that outlines your strategy for repaying your debts and when you expect each debt to be paid off in full. Common examples of such strategies include selling off assets, re-financing long-term debts, taking out business loans, or selling ownership shares. The bankruptcy court must approve your reorganization plan along with your creditors.
When is a franchisee's termination deemed to be complete?
Where a franchisor has given notice of termination and the time for the termination pursuant to the contract has expired before the franchisee files for bankruptcy, the termination is deemed to be complete before the bankruptcy filing and the contract is not property of the estate.
What is a business bankruptcy?
Business bankruptcies are filed to preserve assets, distribute assets equitably and/or facilitate orderly liquidation. When a business files for bankruptcy, it may choose to liquidate under Chapter 7 or it may file for reorganization under Chapter 11, under Title 11, of the United States Bankruptcy Code. Subscribe.
How to assume an executory contract?
To assume an executory contract, a franchisee-debtor must declare its intention by filing a motion with the court. If the executory contract is not in default, the franchisee-debtor is entitled to court approval of the assumption, as long as (i) the contract appears to be in the best interest of the estate, (ii) the debtor is able to perform and (iii) the assumption is supported by reasonable business judgment. [ 29] Assumption and rejection are addressed by Section 365 of the Bankruptcy Code.
How long do you have to file for bankruptcy?
If the franchisee still has a right to cure, the filing of the bankruptcy before the cure deadline protects that right. Applicable law will decide whether the cure period is: 1 the express contractual period, 2 any state law statutory cure period, 3 within 60 days after the filing of bankruptcy or 4 in a Chapter 11 case, up until confirmation of a plan of reorganization.
What chapter does a business file under?
If the entity chooses to continue operation, generally it will file under Chapter 11, but it always has the opportunity to “convert” to the other chapter. In a Chapter 7 case, a trustee is appointed to account for the assets and liabilities of the business.
Can a franchisee file for Chapter 13?
An individual franchisee may also file a “wage-earners plan” under Chapter 13, which gives a debtor with regular income an opportunity to repay debts. Although Chapter 13 rules expedite the procedure, a franchisor should generally treat a Chapter 13 case as if it were filed as a business bankruptcy under Chapter 11.
Who are the creditors?
creditors, which include landlords, suppliers and franchisors with claims ; a Creditors Committee comprised of three to seven creditors who are selected by an arm of the U.S. Department of Justice called the U.S. Trustee Program (the committee retains counsel and often a financial advisor paid for by debtor);